prevention and enforcement of m/w/dbe and other ... presentation construction ethics.pdf ·...

Prevention and Enforcement of M/W/DBE and Other Construction Frauds

MTA Office of The Inspector General

Cliff Brock Chief, Construction Fraud Unit MTA OIG

Construction Fraud 1

WHAT THE MTA OIG DOES

Prevent Fraud Waste & Abuse Audit Function Investigative Function Construction Fraud Unit

Construction Fraud 3/25/2013 2

COMMON TYPES OF FRAUD

Bid-Rigging & Collusion Product Substitution False claims / Overcharging / Mischarging Prevailing Wage Violations Bribery & Kickbacks Embezzlement Disadvantaged-Business (DBE) Fraud Quality-Control Testing Fraud Construction Fraud 3/25/2013 3

It’s a Crime

• A colluded bid submission is a crime • A false change order is a crime • A false certified payroll is a crime • A false request for payment is a crime • A false DBE Utilization form is a crime • A false business record is a crime • Altering documents is a crime


What We’ll Focus on Today

Disadvantaged-Business (DBE) Fraud Prevailing Wage Violations Bribery-Kickbacks Embezzlement Quality Testing Fraud


DBE Fraud schemes •“Front” company scheme -

• Company exists only on paper. • Work is done by the prime contractor.

•“Pass-Through” scheme – Real DBE but not doing the work. DBE performs no commercially-useful function, just processes paperwork. Work is done by non-DBE subcontractor or prime.

• Use of DBE without its knowledge. • Late pay to force DBE off job.


Construction Fraud

DBE Program, US Dep’t of Transportation, Federal Transit Admin.

• Regulations, 49 CFR Part 26 (Code of Federal Regulations)

• Applies to any contract that is even partially funded with Federal Transit Funds. 49 CFR 26.3

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Construction Fraud

Calculation of DBE Participation • 49 CFR 26.55, How DBE Participation is Counted Toward

Goals • Entire Amount of work performed by DBE, including

supplies purchased or equipment leased. (except if from Prime)

• Entire amount of Fees for bona fide commissions or Professional Services

• If DBE subcontracts out any of his work, only count the amount subcontracted to another DBE subcontractor. Work that a DBE subcontracts out to a non DBE does not count toward the goal.

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Construction Fraud

COMMERCIALLY USEFUL FUNCTION

• COUNT EXPENDITURES TO A DBE ONLY IF IT PERFORMS A COMMERCIALLY USEFUL FUNCTION. 49 CFR 26.55(c)1

• When DBE is responsible for execution of the work and is carrying out its responsibilities by actually performing, managing and supervising the work.

• DBE must be responsible for negotiating price, ordering, determining quality and quantity, installing and paying for the material.

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Construction Fraud

NOT COMMERCIALLY USEFUL

• A DBE does not perform a commercially useful function if its role is as an extra participant through which funds are passed (A pass through) in order to obtain the appearance of DBE.

• If DBE doesn’t perform or exercise responsibility for at least 30% of its contract, You must presume it is not performing a commercially useful function.

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Construction Fraud

Comm. Useful, Materials & Supplies

• If from DBE manufacturer, 100%. Must operate factory.

• If from Regular Dealer, 60%. • Must own, operate or maintain a store or

warehouse where materials, supplies, articles or equipment are bought, stored and regularly sold.

• Must be an established, regular business with its principal business under its own name, in purchase and sale of products in question.

• Bulk Materials: If owns distribution equipment, ownership of store or warehouse not required.

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Construction Fraud

Final Word DBE Calculations

• Other purchases from DBE: Treat as a broker and allow only the fee or commission.

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Construction Fraud

Good Faith Efforts

• Efforts to achieve DBE goal or other requirement of the CFR, which, by their scope, intensity and appropriateness to the objective, can reasonably be expected to fulfill the program requirement.

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Construction Fraud

Examples of Good Faith Efforts

• Soliciting interest of DBEs • Breaking down work into smaller units. • Providing plans in a timely manner. • Negotiating in good faith • Not rejecting DBEs without sound reason.

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Construction Fraud

Examples of Good Faith Efforts 2

• Making efforts to assist in bonding, credit lines or insurance.

• Making efforts to assist in obtaining equipment, materials, etc.

• Attending meetings.

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DBE Fraud Sample Indicators

•Contact by unknown subcontractor •Certified payrolls from unknown contractor •DBE owner never at site •Workers switch back & forth between payrolls of DBE and prime •DBE with no facilities, equipment or workers •DBE trucker who owns two trucks, but many on site •Two Party Checks

•Orders / payment for supplies handled by non-DBE •DBE “Owner” is former employee of non-DBE company; only works on its jobs. •Companies share address / phone number •Wrong or covered company name on vehicles


DBE Investigations

• Gather Paperwork – Contracts-Subcontracts – Utilization Forms – Intents to Perform – Monthly Progress Reports – Certified Payrolls-Sign in Sheets-Daily Reports


DBE Investigations

• Investigative Techniques

Construction Fraud

• Surveillance • Interviews • Undercovers • Search Warrants

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Prevailing Wages- Davis-Bacon & Section 220 NYS Labor Law

• D-B Act sets Prevailing Wage rates for various labor categories. Violation cheats workers and government and provides unfair economic advantage in bidding. 40 U.S.C. 3141

– 2 sets of books conceal the underpayments – Pay the employees the correct amount but make them

pay some back – Pay proper wage for regular but not OT hours – Day laborers – Phantom benefits Does the certified payroll match the workers actually on site?


Prevailing Wage Fraud – Why?

Greed

• Contractors know how much labor is involved in a job they’re bidding on.

• Allows them to underbid honest contractors.


Construction Fraud

Federal Crimes • Making a False Statement, 18 USC 1001 • Mail Fraud re: Monthly Progress Reports • Wire Fraud re: Interstate FAXES, Emails, Texts • Money Laundering re: Movement of Funds

received from the fraud. • Tax Evasion – Payroll Tax • Theft from Union Benefit Plans

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New York State Crimes

• Offering a False Instrument for Filing in the First Degree. PL 175.35

• Falsifying Business Records in the First Degree. PL 175.10

• Grand Larceny. PL 155.30-42 • Spota Bill. Failure to Pay Prevailing Wage LL

220


Construction Fraud

Civil Remedies

• Federal & NYS False Claims Acts • Responsibility Determination • Debarment • Contract liquidated damages • Hold Back payment • Restitution • Cost of Investigation

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EMBEZZLEMENT

• Transit authority Exec Director and Admin Asst. in Pennsylvania embezzled $419K of transit funds;

• NJ airport owner stole $375K of grant funds. •Employee stole 1500 fare cards worth $45K.

24 Construction Fraud

Bribery & Conflicts-of-Interest

• Bribery - A public official takes something of value to help a contractor - steer a contract, provide confidential information, or to overlook overbilling, substandard materials, or poor performance, etc. Not only money.

• Conflict - Public official involved with a government contract that also

involves the official’s personal financial interests, or a family member, or a company that the official is seeking employment with.

• Many Agencies have Stricter Conflict Rules in Code of Ethics


Bribery Examples

Official took over $150,000; allowed contractor to participate in drafting contract spec’s & steered sole-source contracts.

Contractor bribed municipal official for DBE certification, used to fraudulently obtain DBE subcontracts.

Contracted-inspector accepted $25K in bribes, allowing city to be

overbilled $1.4 million for sub-standard road milling work. Two employees agreed to take over $500,000 to influence the

settlement of a multimillion $ claim on bridge reconstruction project. Bridge inspectors accepted bribes; falsely certified quality & quantity of

bridge painting.


Bribery -

Sample Indicators • Business or social relationships between contractors and persons involved

in award or oversight process; too close.

• Unexplained or unusual favoritism to contractor/vendor.

• Change orders approved with insufficient justification or invoices with insufficient documentation.

• Repeated sole source or “emergency” awards by same official to same contractor.

• Insistence on use of a specific subcontractor.

• Good ratings given or continuing awards to contractors with poor performance records.

• Documents prepared by contractor that should be prepared by govt. employees.

• Official’s lifestyle exceeds salary.


Kickbacks

Contractor, subcontractor or employee secretly pays a fee for being awarded the contract or getting the job – amount may be passed on to the government as a cost.

Watch for: • Unexplained / unreasonable limitations on the number of potential

subcontractors. • Continuing awards to subcontractors with poor performance

records. • Non-award of subcontract to lowest bidder. • “No-value-added” technical specifications that dictate contract

awards to particular companies.


Testing Fraud Examples

• Inspectors randomly marked asphalt samples to be tested with paint, but didn’t take them. Company checked which samples would pass density test, took other core samples and marked them with same color paint. Substituted & turned over only good samples.

• Concrete samples secretly removed overnight by

contractor to be strengthened and then returned to project site.


Testing Fraud- Concrete cases charged


Testing Fraud – Sample Indicators

• Contractor employees regularly taking or labeling QC samples away from inspector oversight.

• Contractor insisting on transporting QC samples from site to lab. • Contractor not maintaining QC samples for later quality assurance

testing. • Contractor challenging results or attempting to intimidate QA

inspectors who obtain conflicting results. • Photocopies of QC test results where originals are expected. • Alterations or missing signatures on QC test results. • Odd test results - too quick, too perfect, too uniform. • Test results dated too close in time to when sample taken.


Testing Fraud – Sample Indicators

Field testing results when no field test equipment present at site.

Density test when no scales at site. Air Entrainment test when no air pot on site.


Train Project Management Team- First Line of Defense

Reduce Opportunities for Fraud

• Analyze / review operations to identify risks.

• Know who is on the site; know your contractors, vendors, workers. Provide high-visibility oversight.

• Be engaged and proactive. Scrutinize. Verify. Double-check.

• Report suspicions of wrongdoing. Construction Fraud 3/25/2013 33

Training: Advise Construction Team If they suspect fraud:

• Document the activity they suspect to be fraudulent

• Seek an explanation for irregular activity, if possible

• Copy all relevant documents and take photographs if possible

• Do not alert those involved or others to suspicions

• Report concerns or suspicions to management and referral to the IG

• Can report directly to the IG and remain confidential


Contractor Access Forms

• Institute if Not Already in Place • Make Sure They’re Accurate • Documents who was actually on site • Security • Tool for Prevailing Wage Violations

– Davis Bacon – Section 220 NYS Labor Law

• Tool for DBE Fraud Investigations


Contracting Oversight - Vigilance, Vigilance, Vigilance

Contracting officers / representatives have a direct and essential role:

• checking the documents • making physical inspections • looking at invoices • asking questions, applying scrutiny.

How Do You Know It’s So? Construction Fraud 3/25/2013 36

Deterrence

• Kick Off Meetings • Site Visits • Progress Meetings • Contractor Access Forms • Review of Change Orders


Kick Off Meetings

• Let contractors know we are watching. • Spell out,

– “It is a crime to file false documents.”

• Make it clear we will recommend prosecution.


Site Visits (Requires investigators to have proper safety training)

• Generally Unannounced • Interview workers, from printed questionnaire. • Determine employer, hours, pay, O/T, examine photo ID &

Union Card • Look for materials • Contractor Access Forms • Safety Issues


Progress Meetings

• Attended well over 200 • Reinforce fact that we are watching • Get on mailing list for DBE forms • Don’t always review them but “We’re

watching.” • Found recently that a DBE under

investigation is listed as DBE supplier.


Teamwork • Work with other agencies. • Often with

– USDOT OIG – USDOL OIG – Port Authority OIG – Other federal and state agencies

• Extra bang for the buck


Recently Completed Cases

• Schiavone • Skanska • Dragados/Judlau Joint Venture


Determining the Penalty

• Normally up to the Prosecutor – Often the amount of the DBE credit falsely taken – Can theoretically be the entire contract amount. – Under the Federal False Claims Act-Treble

Damages


Penalties Cont’d

• As a non-law enforcement agency we can’t share in federal asset forfeiture. – Schiavone-$20 Million all to US Gov’t.

• Can sometimes recover cost of investigation – Schiavone-$1.833 Million to MTAOIG

• Skanska-$19.6 Million Settlement – US Attorney agreed to give us half


Use of Proceeds of Penalties

• Relatively small portion goes directly to MTA OIG, which is available for investigative costs and equipment.

• Majority, including $9.8 Million from Skanska went to MTA. – Used in Mentoring Program

• Training and assisting minority businesses.

– Used for Outside Monitors


Vendor Evaluation The Fallacy of “The Low Bid Price.”

Is the Vendor Responsible? IS the Bid Responsive?

Even if Vendor Responsible and Bid Responsive, Other Factors?

•Technical Capability –Past Performance at all MTA Agencies. – Physical Plant – Quality Programs – Related Experience

• Moral Integrity • Business Experience & Stability • Financial Condition

• Technical – QPL – Normal Bid – Evaluation

• Commercially –Lead Time – Ability to Cancel – Requirements

• Legally

• Product Tests (to get competition) • Under $15K • RFP Criteria • A/E Firm quality (To find the best firm) • Adjustments to Bid Price

–Life Cycle Cost – Cost Equivalents – Split Awards for Extra Protection

• Emergencies

3/25/2013 46 Construction Fraud

MTA Independent Private Sector Inspector General Program

• The program establishes a pool of pre-qualified parties to serve as Independent Private Sector Inspector Generals (IPSIGs) on an “as needed” basis. IPSIGs are called upon to serve as integrity monitors for vendors needing oversight as a condition of doing business with the MTA and its constituent Agencies.


Creation of the MTA IPSIG Program

• Request for Information (RFI) Issued. • Pre-Proposal Conference – Answer questions and gauge

interests. • Assess Proposals and Interview qualified firms. • Assess interview results. • Determine strengths and assign to specific areas of

interests. • Maintain database of active IPSIG participants. • Current database has 22 active IPSIG participants.


Selected IPSIG Firms and Category Assignments

• Internal Controls BDO USA, LLP • WDBE FTI Consulting, Inc. • Safety, Financial Services KPMG LLP • A&E Navigant Consulting, Inc. • Inspection & Testing Fraud Kroll, Inc. • Information Technology The Bradlau Group LLP • Financial Review Thacher Associates, LLC • Prevailing Wage Fortress Monitoring Group • Investigation Guidepost Solutions, LLC • Indictment Armand Resource Group, Inc. • Civil/Criminal Guilt Ronald Goldstock • Organized Crime, Doar Rieck Kaley & Mack • Integrity Challenge Harmon, LLC


Case Study

• Dragados/Judlau Joint Venture – East Side Access

• Offshoot of Skanska Case • Civil Fraud Unit of US Attorney, SDNY

– False Claims Act Settlement-$7.5 Million • $1 Million to MTAOIG

Problem. Are they responsible Contractors? MTA Determined that they are.


Case Study Cont’d-Dragados/Judlau

• NYC Transit, Office of Vendor Relations • Could they find the companies responsible. • Responsibility Hearing • Assessor to determine whether had appropriate

compliance program. • Determined that the Dragados compliance

program was state of the art. • MTA still using the companies, at least one of

which has set the standard in compliance.


Interaction with Vendor Relations and Division of Diversity and Civil Rights

• Work with NYCT Vendor Relations – Assist in Responsibility Hearings – Vetting Monitors

• Division of Diversity and Civil Rights – Conduct Training – Answer Questions – Assist in troubling areas


ADDITIONAL RESOURCES

• MTA OIG For more information please visit websites

www.mtaig.state.ny.us

www.oig.dot.gov

www.PreventTransportationFraud.org and


http://www.oig.dot.gov/

Questions?


Can Also Contact US DOT OIG

NY Office:

(212) 337-1250

or HOTLINE 1(800) 424-9071

Or e-mail

[email protected]
