Performing a “Commercially Useful Function”: Material Supplier Fined Nearly $5,000,000 under False Claims Act

Since 1983, federal statutory provisions have required that 10% of funds authorized for highway and transit financial assistance programs be expended with DBEs.  According to the United States Department of Transportation, the DBE (Disadvantaged Business Enterprise) program is designed to increase participation by MBEs (Minority Business Enterprise) in state and local procurement.  To be certified as a DBE, a firm must be “a small business owned and controlled by socially and economically disadvantaged individuals” including women and minority group members.  Simply qualifying as a DBE is not sufficient, in and of itself, to justify a firm’s participation in a project, and thereby reaping resulting federal funds.  Rather, the DBE must perform a “commercially useful function” to the project.  A DBE does not serve a commercially useful function if its role is limited to that “of an extra participant to a transaction through which funds are passed to create the impression that one or more members of a historically disadvantaged group worked on a project.”

In 2008, authorities began a thorough investigation of prime contractors that conducted business with a now-defunct subcontractor, American Indian Builders & Supply, Inc. (AIB), which had been certified as a DBE and had allegedly performed work and/or provided materials on multiple federally funded projects.  The investigation revealed that several prime contractors listed AIB as a subcontractor that worked on, or supplied materials to, federally-funded projects when, in fact, AIB had done neither.  Instead a third-party (herein referred to as “Company X”), that would not on its own qualify as a DBE, performed the work\supplied the materials and received the federal funds.  Specifically, Company X would perform the work\supply the materials, then provide documentation and invoicing to AIB, for AIB to then modify onto their own invoices, mark up, and submit to the prime contractors for payment.  For its part, AIB would collect a small percentage of the subcontract as compensation for the use of its name and DBE status.  Federal investigators alleged that Company X enabled several prime contractors to represent falsely that AIB had performed a commercially useful function on federally-funded contracts by negotiating price and other terms of sale when, in reality, the prime contractors had negotiated with Company X.  The allegations continue that AIB, for its involvement, was simply a pass through entity on the projects, used for its DBE certification by Company X.

Settlement between the multiple investigatory agencies (including the United States Attorney’s Office for the Northern District of New York and the Federal Bureau of Investigation) and Company X was reached in August, 2015.  For its part, Company X acknowledged that it had enabled prime contractors to certify falsely that AIB served as a subcontractor by permitting AIB to invoice to the prime contractors for the work and materials provided by Company X, which constituted the submission of false or fraudulent claims for payment from federal funds.  For its role, Company X has agreed to pay the United States $4,945,000.00 under the False Claims Act “to resolve allegations that it participated in a scheme designed to take advantage of the Disadvantaged Business Enterprise (DBE) program in order to obtain subcontracts on federally-funded projects.”

Navigating the legalities and logistics of DBE and MBE programs can be challenging, in light of recent investigations.  If you have any questions, or if we can be of any assistance, please contact our office.

– Cody R. Loughridge