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
Fraud Discovery, Schemes, and Indicators
DBE Fraud and Case Studies
Detection and Deterrence of DBE Fraud

3. 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

4. Investigative Regions
Cambridge, MA
(617)
New York, NY
(212)
Washington, DC
(202)
Atlanta, GA
(404)
Chicago, IL
(312)
Ft. Worth, TX
(817)
San Francisco, CA
(415)

5. 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

6. FHWA: $27.5 Billion FAA -AIP: $1.1 Billion FRA : $8 Billion
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

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

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

9. 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

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

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.

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
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
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

14. 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

15. 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.

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
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
– 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.
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
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
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

27. 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.

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.

33. 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

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.
Minority Business Enterprise Council (MBEC) is Philadelphia’s agency responsible for certifying DBE’s.
Another case involved DBE certification fraud with a twist of bribery. Daniel Pellicciotti wanted his business Philly-Wide Interiors to succeed. He was already connected to city hall, but he also wanted the competitive advantage of a DBE, even though he was a white male.

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 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.
Pellicciotti persuaded his wife, a full-time nurse, to apply for DBE certification as the owner and manager of Philly-Wide Interiors; and he bought insurance for a favorable DBE certification decision by providing cash and meals to a DBE certifier. It paid off—a $228K demolition contract on a transit project.

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.
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.
It paid off until the DBE certifier was implicated in an undercover operation and cooperated to limit his own criminal exposure by providing evidence against Pellicciotti.

37. 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

38. ANOTHER DBE 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.

41. AGW Shop Facility

42. AGW Delivery Truck
AGW’s 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.
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.

45. KOSS PO 2944

46. KOSS PO 2944

47. KOSS PO 2950

48. KOSS PO 2950

49. Carter Waters
Missing Documents
PURCHASE 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, (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…

53. CARTER WATERS INC. III. TERMS AND CONDITIONS
1 Carter-Waters agrees to pay to the United States $176, (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, (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, (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. 
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 E-Mail: Hotline@oig.dot.gov
Write: U.S. DOT/OIG
P.O.Box 23178
Washington, DC

58. QUESTIONS Senior Investigator George F. Sullivan
U.S. Department of Transportation
Office of Inspector General