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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.

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Presentation on theme: "Build Your Future for DBEs CONFERENCE Minority-Owned Business Fraud in Transportation Senior Investigator George F. Sullivan U.S. Department of Transportation."— Presentation transcript:

1 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

2 Overview Mission and Priorities Mission and Priorities Fraud Discovery, Schemes, and Indicators Fraud Discovery, Schemes, and Indicators DBE Fraud and Case Studies DBE Fraud and Case Studies Detection and Deterrence of DBE Fraud Detection and Deterrence of DBE Fraud

3 OIG Mission To conduct objective audits and investigations of DOTs programs and operations To conduct objective audits and investigations of DOTs programs and operations To promote economy, effectiveness, and efficiency within DOT To promote economy, effectiveness, and efficiency within DOT To prevent and detect fraud, waste, and abuse in the Departments programs To prevent and detect fraud, waste, and abuse in the Departments programs To review existing and proposed laws or regulations affecting the Department and make recommendations about them 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 To keep the Secretary of Transportation and Congress fully informed about problems in departmental programs and operations

4 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) 744-3090InvestigativeRegions

5 American Recovery & Reinvestment Act 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. 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 Americas roads, bridges, transit lines, and rail systems since the creation of the interstate highway system. According to the Secretary of Transportation, ARRA represents the largest investment in Americas roads, bridges, transit lines, and rail systems since the creation of the interstate highway system. Key provisions: preserve and create jobs preserve and create jobs promote economic recovery promote economic recovery invest in transportation infrastructure to provide long-term economic benefits invest in transportation infrastructure to provide long-term economic benefits

6 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 How to use this money

7 Contract/Grant Fraud Contract Fraud Initiative Is Our Number One Priority Contract Fraud Initiative Is Our Number One Priority Statistics FY-2009 and 2010 combined Statistics FY-2009 and 2010 combined - 35 Indictments - 35 Indictments - 62 Convictions - 62 Convictions - $20 Million in Fines & Restitution, etc. -. - $20 Million in Fines & Restitution, etc. -.

8 OIG - Investigations U.S. Courts The Process: Referral-Investigation- Prosecution

9 Characteristics of an Administrative/Civil Action Non-compliance with DOT Regulations Non-compliance with DOT Regulations Inadvertent/Not deliberate Inadvertent/Not deliberate Proved by a Preponderance of Evidence Proved by a Preponderance of Evidence Sanctions can include Orders to take Corrective Action, Repayment of funds, Withhold funding, Return of funds Sanctions can include Orders to take Corrective Action, Repayment of funds, Withhold funding, Return of funds

10 WOULD YOUR COMPANY SURVIVE THIS TYPE OF FINANCIAL HIT AT THE END OF A CONTRACT? $1,817,619

11 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. 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.

12 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 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. 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.

13 Minority-Owned Business Red Flag Indicators Minority owner lacks background, expertise, or equipment to perform subcontract work Minority owner lacks background, expertise, or equipment to perform subcontract work Employees shuttle back and forth between prime contractor and minority-owned business payrolls 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 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 Orders and payment for necessary supplies are made by individuals not employed by minority- owned business

14 Minority-Owned Business Red Flag Indicators Continued Prime contractor facilitated purchase of minority- owned business Prime contractor facilitated purchase of minority- owned business Minority-owned business owner never present at job site Minority-owned business owner never present at job site Prime contractor always uses the same minority- owned business Prime contractor always uses the same minority- owned business

15 Why Employees Do Not Report Fraud According to a 2005 Business Ethics Study, employees do not report fraud because they: According to a 2005 Business Ethics Study, employees do not report fraud because they: Believe nothing will happen. Believe nothing will happen. Dont know who to contact. Dont know who to contact. Think the report will not be kept confidential, so supervisors or co-workers might retaliate. Think the report will not be kept confidential, so supervisors or co-workers might retaliate. Believe the situation has no personal impact on them. Believe the situation has no personal impact on them.

16 OIG Focus on DBE Fraud

17 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.

18 Could this be you? The Justice Department announced today The Justice Department announced today Two Michigan Construction Firms to Pay More Than $1.4 Million to Resolve Alleged False Claims Two Michigan Construction Firms to Pay More Than $1.4 Million to Resolve Alleged False Claims

19 John Carlo Inc. and Angelo Iafrate Are alleged to Have Falsely Claimed Using Disadvantaged Business at Detroit Airport 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 – 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

20 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. 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. 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.

21 Minority-Owned Business Example State DOT decertified DBE company for not being independent of prime 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 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

22 Minority-Owned Business Example An investigation/analysis was conducted An investigation/analysis was conducted Conducted interviews, issued subpoenas, and reviewed project files Conducted interviews, issued subpoenas, and reviewed project files Prime established a former employee as a DBE and controlled all aspects of DBE business operations Prime established a former employee as a DBE and controlled all aspects of DBE business operations DBE contracted exclusively with prime DBE contracted exclusively with prime As a result of the investigation/analysis As a result of the investigation/analysis DBE confessed to making false statements and agreed to cooperate DBE confessed to making false statements and agreed to cooperate Prime acknowledged making false statements and paid $2.5 million fine Prime acknowledged making false statements and paid $2.5 million fine

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27 DBE Fraud Schemes Legitimate, DBE certified Cement Company has been in business for 25 years providing curb and gutter work. 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. DBEs only actual participation on the project was to provide invoice payment services, and payroll services, for a fee. Owner is approached by non-DBE owned company to assist in meeting their contract DBE goals. DBEs only actual participation on the project was to provide invoice payment services, and payroll services, for a fee.

28 BORBOLLA fee schedule presented to AJAX

29 AJAX strikes agreement with BORBOLLA on pass- through fee

30 Project manager implicates AJAX VP in $10 M DBE scheme

31 Settlement for $11.75 M and Compliance Agreements

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

33 DBE Fraud Schemes False Eligibility The DBE does not belong to one of the recognized socially or economically disadvantaged groups 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 The DBE provides false information concerning size or financial status Hidden assets or false statements concerning origination of capital Hidden assets or false statements concerning origination of capital

34 Bribery to Falsify DBE Certification Background Daniel Pellicciotti, nephew of a former Philadelphia councilman, is a non- disabled white male who incorporated the contractor Philly-Wide Interiors in 1998. 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 Philadelphias agency responsible for certifying DBEs. Minority Business Enterprise Council (MBEC) is Philadelphias agency responsible for certifying DBEs.

35 Bribery to Falsify DBE Certification Scheme 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 Pellicciottis wife, a full-time nurse. 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 Pellicciottis 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. Philly-Wide used its DBE certification to obtain a $228K contract in 2001 for demolition and refurbishment work on a transit contract.

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

37 DBE Fraud Schemes Conduit Companies Conduit Companies DBE firm does not complete any of the contracted work DBE firm does not complete any of the contracted work The DBE sells his status to another company who completes the 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 Usually allows the use of the DBE name on invoices, trucks, equipment

38 ANOTHER DBE FRONT ? AGW STEEL PRODUCTS was an Illinois Certified DBE firm. AGW STEEL PRODUCTS was an Illinois Certified DBE firm. Operated by Mr. & Mrs. Harvey Williams, and an occasional part time employee. 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. Williams claimed he was certified in seventeen states as a DBE steel supplier. In Nebraska, he was certified as a steel manufacturer. In Nebraska, he was certified as a steel manufacturer.

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41 AGW Shop Facility

42 AGW Delivery Truck AGW Delivery Truck

43 AGW Projects AGW was identified as the DBE steel supplier on several Kansas highway projects, with a combined value of over two million dollars. 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. 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 manufacturers representatives used the AGW DBE status as a selling point, to help prime contractors meet the DBE goals. The review also disclosed that one of the manufacturers representatives used the AGW DBE status as a selling point, to help prime contractors meet the DBE goals.

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45 KOSS PO 2944

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47 KOSS PO 2950

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49 Carter Waters Missing Documents Missing Documents PURCHASE ORDER FROM AGWPURCHASE ORDER FROM AGW

50 CONSEQUENCES

51 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.

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

53 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,

54 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.

55 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.

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

57 DOT/OIG Hotline Call: 1-800-424-9071 Call: 1-800-424-9071 E-Mail: Hotline@oig.dot.gov E-Mail: Hotline@oig.dot.gov Write: U.S. DOT/OIG Write: U.S. DOT/OIG P.O.Box 23178 Washington, DC 20026-0178

58 QUESTIONS Senior Investigator George F. Sullivan U.S. Department of Transportation Office of Inspector General 312-353-0450George.f.sullivan@oig.dot.gov


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