Minority Business Enterprise Laws Present Opportunity, Growing FCA Risk

Posted by Kristin Graham Koehler and Nicholas J. Giles

Under certain federal laws, as well as those of a number of states and cities, minority-owned business are often afforded preferential treatment in securing certain government contracts. These laws typically set aside a certain number of contracts for minority-owned businesses, or require the winning bidder to utilize minority-owned subcontractors for a certain percentage of the contract’s work. These laws are designed to address the racial disparity in business ownership by ensuring minority business owners are given the opportunity to succeed.

Many of those seizing the opportunities, however, are not minorities at all. Abuse of these programs is rampant and growing, prompting government agencies and law enforcement across the country to crack down on the abuse, often through criminal prosecution. In June, for instance, a federal judge in Virginia sentenced an Arlington businessman to two years in prison for his role in funneling lucrative government contracts intended for minority-owned firms to a security company through a shell entity. United States v. Richards, No. 1:13-cr-00076-001, 2013 WL 2957963 (E.D. Va. June 14, 2013). And, in September, a federal judge in Chicago sentenced two individuals to four-and-a-half and three years in prison respectively for securing cable contracts through an African-American college student whom they put forward as a front company. United States v. Giovenco, No. 1:11-cr-00316 (N.D. Ill. Oct. 10, 2013); United States v. Potter, No. 1:11-cr-00316 (N.D. Ill. Oct. 10, 2013).

Contracting rules often require explicit certification of eligibility, and, therefore, running afoul of minority business laws presents a risk of civil liability as well, including under the False Claims Act. In June, several Dayton, Ohio-based businesses and their owners agreed to pay $2.9 million to resolve allegations that they set up and controlled a sham minority-owned business to exploit the Department of Transportation’s Disadvantaged Business Enterprise (DBE) program. United States ex rel. Parker v. TesTech, Inc., No. 2:10-cv-01028 (S.D. Ohio June 11, 2013). In March of last year, Caddell Construction of Alabama, agreed to pay $1.15 million to settle allegations that it had engaged a Native-American owned company under a Department of Defense initiative, when, in reality, that company performed no real work under the contract. And, in 2012, a Cleveland-based construction company, Anthony Allega Cement Contractor, Inc., paid $500,000 to settle allegations that it used a similar sham “pass through” entity to satisfy the Department of Transportation’s minority subcontracting requirement under its DBE program.

As abuse continues to plague these programs, expect jurisdictions at all levels – federal, state and local – to turn increasingly to their false claims acts as an enforcement mechanism.