GUEST EDITORIAL Law Enforcement Trends: Criminalization of Government Contract Violations I n April 2012, a major construction com- pany—Lend Lease (US) Construction LMB Inc. (“Lend Lease”)—was charged with committing a series of frauds, including minority-contracting fraud. To resolve all allegations, Lend Lease agreed to pay approximately $56 million under a deferred prosecution agreement. A former key executive was also charged for his alleged role in one of the charged fraud schemes. That executive pleaded guilty and faces up to 20 years in prison. Engineering and construction firms, their executives and subcontractors are at significant risk of criminal prosecution from any violations of set-aside rules benefiting minorities, women and other disadvantaged groups. Federal criminal cases charging minority-contracting fraud have been brought in recent years in nine states. Outcomes for companies have included felony convictions, suspensions, debarments and cost ly deferred- prosecution agreements. Many individuals have gone to prison. Our firm has represented, and is representing, publicly- held and private companies in several states in investigations related to contracting with minority business enterprises (MBE), women business enterprises (WBE) and disadvantaged business enterprises (DBE)—collectively referred to as “MW/DBE” in this article. MW/DBE Subcontracting Requirements Many government contracts require prime contractors to meet MW/DBE goals by utilizing MW/DBE subcontractors or sup- pliers. The MW/DBEs used must be certi- fied in order for prime contractors to receive credit toward fulfilling set-aside goals. Once a contract is awarded, the government customer monitors the compliance of prime AUTHOR contractors by requiring regular progress reports demonstrating MW/DBE compliance. Contrary to the belief of many firms, working with a certified MW/DBE does not insulate prime contractors from possible criminal liability—virtually every recent prosecution has involved certified MW/DBEs. Prime contractors, their executives, employees, suppliers, subcontractors and subcontractors’ emp l o y e e s c a n b e prosecuted under fraud and conspiracy laws if they devise or participate in a scheme to defraud and do anything to carry it out, such as making mis- representations regarding MW/DBE compliance at any point in the con- tracting process. Because the MW/DBE certification and contracting process usually involves postal mail and email, this provides federal prosecutors with jurisdiction under mail and wire fraud statutes (among others). MW/DBE-related prosecutions are Merely purporting to have a minority, woman or disadvantaged owner is insufficient to meet MW/DBE ownership requirements. certified companies. With pressure on bidding companies, employees who are responsible for set-aside compliance may resort to using pass-through entities or other schemes to qualify a bid and to demonstrate compliance if they win. Under federal criminal law, any falsehoods regarding MW/DBE compliance during the bid process, billing, and reporting might be federal crimes. Further, once the government opens a fraud investigation, prosecutors can search far and wide for additional criminal law violations unrelated to MW/DBE issues. In addition, nothing in the law prohibits prosecutors from going beyond the direct contracting com- panies and charging second- or third-tier suppliers who knowingly agree to further the minority contracting scheme. Violations of the “Commercially increasing across the country. Prosecutors appear indifferent to the size of the violation, with amounts at issue ranging from several hundred thousand dollars to more than $100 million. Further, prosecutions are not limited to federally- funded projects. Frequently, purely local and state jobs with no federal funding have been the basis for federal prosecution. Nor does it appear to matter whether contractors provide all project deliverables on time and within budget. Prime contractors are particularly susceptible to pass-through prosecutions. Government customers impose large set- aside requirements without determining if MW/DBE capacity exists within its list of Useful Function” Requirement. The contract provision resulting in the greatest number of MW/DBE fraud prosecutions is commonly known as the “commercially useful function” requirement. Under this specification, the MW/DBE must actually participate meaningfully in the perfor- mance of a contract. Prosecutors may view using a MW/DBE merely to satisfy set-aside goals and little else as an unlawful “pass- through” arrangement. There have been, and are pending, numerous prosecutions and/or expensive non-prosecution resolutions involving pass-through arrangements. For example, in 2011, prosecutors entered into a $19.6 million non-prosecution agreement with a large construction company related to credits claimed under an MW/DBE program. Steven A. Miller, Partner, Reed Smith LLP, and former Chief, Special Prosecutions Division, Office of the United States Attorney for the Northern District of Illinois DEEP FOUNDATIONS • JAN/FEB 2013 • 81
