Build Your Future for Build Your Future for DBEsDBEs

CONFERENCE CONFERENCE

Minority-Owned Business Minority-Owned Business Fraud in TransportationFraud in Transportation

Senior Investigator Senior Investigator George F. SullivanGeorge F. Sullivan

U.S. Department of TransportationU.S. Department of TransportationOffice of Inspector GeneralOffice of Inspector General

OverviewOverview Mission and PrioritiesMission and Priorities Fraud Discovery, Schemes, and Fraud Discovery, Schemes, and

IndicatorsIndicators DBE Fraud and Case StudiesDBE Fraud and Case Studies Detection and Deterrence of DBE Detection and Deterrence of DBE

FraudFraud

OIG Mission OIG Mission

To conduct objective audits and investigations of DOT’s To conduct objective audits and investigations of DOT’s programs and operationsprograms and operations

To promote economy, effectiveness, and efficiency within DOTTo promote economy, effectiveness, and efficiency within DOT

To prevent and detect fraud, waste, and abuse in the To prevent and detect fraud, waste, and abuse in the Department’s programsDepartment’s programs

To review existing and proposed laws or regulations affecting To review existing and proposed laws or regulations affecting the Department and make recommendations about themthe Department and make recommendations about them

To keep the Secretary of Transportation and Congress fully To keep the Secretary of Transportation and Congress fully informed about problems in departmental programs and informed about problems in departmental programs and operationsoperations

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) 744-3090

Investigative Investigative

RegionsRegions

American Recovery & Reinvestment Act American Recovery & Reinvestment Act

• February 17, 2009, the President signed into law the American February 17, 2009, the President signed into law the American Recovery and Reinvestment Act (ARRA), which designated Recovery and Reinvestment Act (ARRA), which designated over $48 billion to the USDOT.over $48 billion to the USDOT.

• According to the Secretary of Transportation, ARRA represents According to the Secretary of Transportation, ARRA represents “the largest investment in America’s roads, bridges, transit “the largest investment in America’s roads, bridges, transit lines, and rail systems since the creation of the interstate lines, and rail systems since the creation of the interstate highway system.”highway system.”

Key provisions:Key provisions:

preserve and create jobspreserve and create jobs

promote economic recoverypromote economic recovery

invest in transportation infrastructure to provide long-term economic benefitsinvest in transportation infrastructure to provide long-term economic benefits

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

Contract/Grant FraudContract/Grant Fraud

Contract Fraud Initiative Is Our Number One Contract Fraud Initiative Is Our Number One Priority Priority

Statistics FY-2009 and 2010 combinedStatistics FY-2009 and 2010 combined

- - 35 Indictments35 Indictments

- 62 Convictions- 62 Convictions

- $20 Million in Fines & Restitution, etc. -.- $20 Million in Fines & Restitution, etc. -.

OIG - InvestigationsOIG - Investigations

U.S. Courts

The Process:The Process:

Referral-Investigation- ProsecutionReferral-Investigation- Prosecution

Characteristics of an Characteristics of an Administrative/Civil ActionAdministrative/Civil Action

Non-compliance with DOT RegulationsNon-compliance with DOT Regulations Inadvertent/Not deliberateInadvertent/Not deliberate Proved by a Preponderance of EvidenceProved by a Preponderance of Evidence Sanctions can include Orders to take Sanctions can include Orders to take

Corrective Action, Repayment of funds, Corrective Action, Repayment of funds, Withhold funding, Return of fundsWithhold funding, Return of funds

WOULD YOUR COMPANY

SURVIVE THIS TYPE OF

FINANCIAL HIT AT THE END OF A CONTRACT?

$1,817,619

FRAUDFRAUD

A Generic Term That Embraces All the Ways A Generic Term That Embraces All the Ways One Person Can Falsely Represent Something One Person Can Falsely Represent Something to Another in Order to Induce That Person to to Another in Order to Induce That Person to Surrender Something of Value.Surrender Something of Value.

Minority-Owned Minority-Owned Business FraudBusiness Fraud

Definition:Definition: Contractors Contractors misrepresents misrepresents who performed who performed contract work to contract work to limit costslimit costs while appearing to be in while appearing to be in compliance with contract requirement to use compliance with contract requirement to use minority/women-owned businessesminority/women-owned businesses

Example:Example: Prime contractor and minority-owned Prime contractor and minority-owned subcontractor submitted false payroll records and prepared subcontractor submitted false payroll records and prepared false job-cost records to indicate that a minority-owned false job-cost records to indicate that a minority-owned business performed specialty painting of highway business performed specialty painting of highway structures, when in fact a majority-owned subcontractor structures, when in fact a majority-owned subcontractor controlled and supervised the painting work.controlled and supervised the painting work.

Minority-Owned Business Minority-Owned Business “Red Flag” Indicators“Red Flag” Indicators

Minority owner lacks background, expertise, or Minority owner lacks background, expertise, or equipment to perform subcontract workequipment to perform subcontract work

Employees shuttle back and forth between prime Employees shuttle back and forth between prime contractor and minority-owned business payrollscontractor and minority-owned business payrolls

Business names on equipment and vehicles are covered Business names on equipment and vehicles are covered with paint or magnetic signswith paint or magnetic signs

Orders and payment for necessary supplies are made by Orders and payment for necessary supplies are made by individuals not employed by minority-owned businessindividuals not employed by minority-owned business

Minority-Owned Business Minority-Owned Business “Red Flag” Indicators “Red Flag” Indicators

ContinuedContinued

Prime contractor facilitated purchase of minority-Prime contractor facilitated purchase of minority-owned businessowned business

Minority-owned business owner never present at job Minority-owned business owner never present at job sitesite

Prime contractor always uses the same minority-Prime contractor always uses the same minority-owned businessowned business

Why Employees Do Not Why Employees Do Not Report FraudReport Fraud

According to a 2005 Business Ethics According to a 2005 Business Ethics Study, employees do not report fraud Study, employees do not report fraud because they:because they:

Believe nothing will happen.Believe nothing will happen.Don’t know who to contact.Don’t know who to contact.Think the report will not be kept confidential, so Think the report will not be kept confidential, so

supervisors or co-workers might retaliate.supervisors or co-workers might retaliate.Believe the situation has no personal impact on Believe the situation has no personal impact on

them.them.

OIG Focus on OIG Focus on DBE FraudDBE Fraud

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.

Could this be you?Could this be you?

The Justice Department The Justice Department announced todayannounced today

Two Michigan Construction Two Michigan Construction Firms to Pay More Than $1.4 Firms to Pay More Than $1.4 Million to Resolve Alleged Million to Resolve Alleged False ClaimsFalse Claims

John Carlo Inc. and Angelo John Carlo Inc. and Angelo IafrateIafrate

Are alleged to Have Falsely Claimed Using Are alleged to Have Falsely Claimed Using Disadvantaged Business at Detroit AirportDisadvantaged Business at Detroit Airport

– – Two Michigan construction companies Two Michigan construction companies have agreed to pay the United States $1.407 have agreed to pay the United States $1.407 million to resolve allegations that they million to resolve allegations that they knowingly submitted false claims relating knowingly submitted false claims relating to a federally funded construction projectto a federally funded construction project

WASHINGTONWASHINGTON The United States alleges that the companies, The United States alleges that the companies,

John Carlo Inc. and Angelo Iafrate John Carlo Inc. and Angelo Iafrate Construction Company, falsely claimed that Construction Company, falsely claimed that they had used Disadvantaged Business they had used Disadvantaged Business Enterprises (DBEs) for part of the work on the Enterprises (DBEs) for part of the work on the project when they had not.project when they had not.

In addition to the $1.407 million payment to In addition to the $1.407 million payment to resolve civil claims, Angelo Iafrate resolve civil claims, Angelo Iafrate Construction has also entered into a separate Construction has also entered into a separate administrative agreement with DOT to ensure administrative agreement with DOT to ensure future compliance with DBE requirements.future compliance with DBE requirements.

Minority-Owned Minority-Owned Business ExampleBusiness Example

State DOT decertified DBE company for not State DOT decertified DBE company for not being independent of primebeing independent of prime

Referred to the U.S. DOT/OIG because they Referred to the U.S. DOT/OIG because they suspected that the prime and DBE knowingly suspected that the prime and DBE knowingly and willfully misrepresented compliance with and willfully misrepresented compliance with DBE program for purposes of obtaining DBE program for purposes of obtaining contractscontracts

Minority-Owned Minority-Owned Business ExampleBusiness Example

An investigation/analysis was conductedAn investigation/analysis was conductedConducted interviews, issued subpoenas, and reviewed project Conducted interviews, issued subpoenas, and reviewed project

filesfiles

Prime established a former employee as a DBE and controlled Prime established a former employee as a DBE and controlled all all aspects of DBE business operationsaspects of DBE business operations

DBE contracted exclusively with primeDBE contracted exclusively with prime

As a result of the investigation/analysisAs a result of the investigation/analysisDBE confessed to making false statements and agreed to DBE confessed to making false statements and agreed to

cooperatecooperate

Prime acknowledged making false statements and paid $2.5 Prime acknowledged making false statements and paid $2.5 million finemillion fine

DBE Fraud SchemesDBE Fraud Schemes

Legitimate, DBE certified Cement Legitimate, DBE certified Cement Company has been in business for 25 Company has been in business for 25 years providing curb and gutter work.years providing curb and gutter work.

Owner is approached by non-DBE Owner is approached by non-DBE owned company to “assist in meeting their owned company to “assist in meeting their contract DBE goals.” DBE’s only actual contract DBE goals.” DBE’s only actual participation on the project was to provide participation on the project was to provide invoice payment services, and payroll invoice payment services, and payroll services, for a fee.services, for a fee.

BORBOLLA fee schedule presented to AJAX

AJAX strikes agreement with BORBOLLA on pass-AJAX strikes agreement with BORBOLLA on pass-through feethrough fee

Project manager Project manager implicates AJAX implicates AJAX VP in $10 M DBE VP in $10 M DBE schemescheme

Settlement for $11.75 M and Settlement for $11.75 M and Compliance AgreementsCompliance Agreements

Consequences to DBEConsequences to DBE

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

DBE Fraud SchemesDBE Fraud SchemesFalse EligibilityFalse Eligibility

The DBE does not belong to one of the recognized The DBE does not belong to one of the recognized socially or economically disadvantaged groupssocially or economically disadvantaged groups

The DBE provides false information concerning size The DBE provides false information concerning size or financial statusor financial status

Hidden assets or false statements concerning Hidden assets or false statements concerning origination of capitalorigination of capital

Bribery to Falsify DBE Bribery to Falsify DBE CertificationCertification

BackgroundBackground

Daniel Pellicciotti, nephew of Daniel Pellicciotti, nephew of a former Philadelphia a former Philadelphia councilman, is a non-councilman, is a non-disabled white male who disabled white male who incorporated the contractor incorporated the contractor Philly-Wide Interiors in 1998. Philly-Wide Interiors in 1998.

Minority Business Enterprise Minority Business Enterprise

Council (MBEC) is Council (MBEC) is Philadelphia’s agency Philadelphia’s agency responsible for certifying responsible for certifying DBE’s.DBE’s.

Bribery to Falsify DBE Bribery to Falsify DBE CertificationCertification

SchemeScheme Pellicciotti provided cash Pellicciotti provided cash

and free meals to an and free meals to an MBEC employee to MBEC employee to influence his decision to influence his decision to certify Philly-Wide as a certify Philly-Wide as a DBE owned and DBE owned and controlled by Pellicciotti’s controlled by Pellicciotti’s wife, a full-time nurse.wife, a full-time nurse.

Philly-Wide used its DBE Philly-Wide used its DBE

certification to obtain a certification to obtain a $228K contract in 2001 for $228K contract in 2001 for demolition and demolition and refurbishment work on a refurbishment work on a transit contract.transit contract.

Bribery to Falsify DBE Bribery to Falsify DBE CertificationCertification

DispositionDisposition Following cooperation and a Following cooperation and a

guilty plea, the MBEC guilty plea, the MBEC employee was sentenced to employee was sentenced to pay $1,500 in restitution and pay $1,500 in restitution and probation for 36 months.probation for 36 months.

After pleading guilty, After pleading guilty,

Pellicciotti and Philly-Wide Pellicciotti and Philly-Wide were sentenced to pay more were sentenced to pay more than $135,000 in fines and than $135,000 in fines and restitution, plus 8 years restitution, plus 8 years probation. Both were probation. Both were debarred from working on debarred from working on Federal-aid contracts for 3 Federal-aid contracts for 3 years.years.

DBE Fraud SchemesDBE Fraud Schemes Conduit CompaniesConduit Companies

DBE firm does not complete any of the contracted DBE firm does not complete any of the contracted workwork

The DBE sells his status to another company who The DBE sells his status to another company who completes the workcompletes the work

Usually allows the use of the DBE name on invoices, Usually allows the use of the DBE name on invoices, trucks, equipmenttrucks, equipment

ANOTHERANOTHERDBE FRONT ?DBE FRONT ?

AGW STEEL PRODUCTS was an Illinois AGW STEEL PRODUCTS was an Illinois Certified DBE firm. Certified DBE firm.

Operated by Mr. & Mrs. Harvey Williams, and Operated by Mr. & Mrs. Harvey Williams, and an occasional part time employee.an occasional part time employee.

Williams claimed he was certified in Williams claimed he was certified in seventeen states as a DBE steel supplier.seventeen states as a DBE steel supplier.

In Nebraska, he was certified as a steel In Nebraska, he was certified as a steel manufacturer.manufacturer.

AGW Shop FacilityAGW Shop Facility

AGW Delivery TruckAGW Delivery Truck

AGW ProjectsAGW Projects AGW was identified as the DBE steel supplier on AGW was identified as the DBE steel supplier on

several Kansas highway projects, with a combined several Kansas highway projects, with a combined value of over two million dollars.value of over two million dollars.

Document review disclosed AGW was purchasing Document review disclosed AGW was purchasing from a broker, and reselling the steel products. They from a broker, and reselling the steel products. They were drop shipped to the project site by the mfg., were drop shipped to the project site by the mfg., and never received by AGW.and never received by AGW.

The review also disclosed that one of the The review also disclosed that one of the manufacturer’s representatives used the AGW DBE manufacturer’s representatives used the AGW DBE status as a selling point, to help prime contractors status as a selling point, to help prime contractors meet the DBE goals.meet the DBE goals.

KOSS PO 2944KOSS PO 2944

KOSS PO 2944KOSS PO 2944

KOSS PO 2950KOSS PO 2950

KOSS PO 2950KOSS PO 2950

Carter WatersCarter Waters

Missing DocumentsMissing Documents

• PURCHASE ORDER FROM PURCHASE ORDER FROM AGWAGW

CONSEQUENCESCONSEQUENCES

No Admission of Guilt But…No Admission of Guilt But…AGW STEEL, INC.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.

IN ADDITION…IN ADDITION…

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

CARTER WATERS INC.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,

KOSS CONSTRUCTIONKOSS 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.

IDEKER INCORPORATEDIDEKER 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.

WHERE DID THE MONEY GO?WHERE DID THE MONEY GO?

After considerable effort by John Ehmen working After considerable effort by John Ehmen working with FHWA Headquarters, KDOT has finally with FHWA Headquarters, KDOT has finally been credited with the settlement funds from the been credited with the settlement funds from the DBE fraud case that was completed this year. DBE fraud case that was completed this year. 

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

DOT/OIG HotlineDOT/OIG Hotline Call:Call: 1-800-424-9071 1-800-424-9071

E-Mail:E-Mail: Hotline@oig.dot.gov Hotline@oig.dot.gov

Write:Write: U.S. DOT/OIGU.S. DOT/OIGP.O.Box 23178P.O.Box 23178Washington, DC 20026-0178Washington, DC 20026-0178

QUESTIONSQUESTIONS

Senior Investigator Senior Investigator George F. SullivanGeorge F. SullivanU.S. Department of TransportationU.S. Department of TransportationOffice of Inspector GeneralOffice of Inspector General312-353-0450312-353-0450George.f.sullivan@oig.dot.govGeorge.f.sullivan@oig.dot.gov