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Contractor Fraud

DBE Contractor and Subcontractor Fraud in FCA Qui Tam Litigation

One of the most common violations of the False Claims Act (FCA) involves the fraudulent utilization of Disadvantaged Business Enterprises (DBEs) as contractors and subcontractors.

This type of fraud occurs when companies falsely represent themselves as DBEs to gain unfair advantages in securing government contracts.

DBE Contractor and Subcontractor Fraud in FCA Qui Tam Litigation
A violation of the FCA involves fraudulent use of Disadvantaged Business Enterprises as contractors.

The implications of DBE fraud can be severe, leading to substantial legal consequences, significant harm to a company's reputation, and even prison time if criminal charges are brought.

The False Claims Act is a federal statute that rewards ordinary citizens who report fraud committed by federal government contractors.

Typically, the citizen, called a "whistleblower," alleges that the contractor fraudulently received or retained federal money by submitting false claims or causing false claims to be submitted to the United States government.

Many whistleblower claims under the FCA involve alleged fraud connected to using disadvantaged business enterprises as subcontractors. These claims are usually related to the DBE's legitimacy, such as whether the entity qualifies for DBE status and whether it performed the requisite work under the general contractor's federal contract. Sometimes, similar allegations can be made in state-level prosecutions.

When seeking to utilize DBEs, government contractors must comply with several regulations, and DBEs are also required to comply. If either party fails to comply, both can face liability under the FCA and state statutes.

For example, when a DBE delivers supplies or materials to be used for the performance of a government contract, they also are responsible for negotiating pricing, determining the quality and quantity of the supplies or materials, ordering and installing the supplies or materials, and paying for the supplies or materials delivered.

What is "DBE" and Its Importance?

Disadvantaged Business Enterprises (DBEs) are small businesses that are majority-owned by individuals who are socially and economically disadvantaged.

These businesses are given special consideration in government contracts to ensure diversity and equality in public procurement. The aim is to level the playing field, enabling DBEs to compete for federally funded contracts.

However, the systems designed to foster inclusion can be susceptible to abuse. Fraudulent schemes involving DBE status can lead to severe legal consequences under the False Claims Act (FCA). Consider the following:

  • A DBE must perform a commercially proper function under the government contract. This is determined based on multiple factors and can be industry-specific. Serving as a "pass-through" entity cannot meet federal or state requirements.
  • A DBE does not perform a commercially useful function if its role is limited to that of an extra participant in the contract and serves as an intermediary through which funds are passed to create the appearance of DBE participation.
  • Suppose a DBE lacks the labor, equipment, financial resources, or expertise to perform the subcontracted work, and the general contractor performs the job. In that case, it cannot be designated as a contract participant. In this case, the general contractor and the DBE are putting themselves at risk for a whistleblower lawsuit or a civil or criminal prosecution.
  • When bidding for a contract under a DBE program, the entities designated as DBE subcontractors must qualify as DBEs under the relevant program guidelines. Misrepresenting companies as DBEs can expose contractors and subcontractors to FCA fraud liability.

What is the False Claims Act and Qui Tam Actions?

The FCA is a federal law that imposes liability on individuals and companies who defraud governmental programs. It includes a provision for Qui Tam actions, allowing private individuals (known as "relators") to file lawsuits on behalf of the government.

These whistleblowers can receive some recovered damages, incentivizing them to expose fraud.

In whistleblower cases under the FCA, also called "qui tam litigation," the relator is entitled to receive a portion of any damages awarded, typically between 15 percent and 30%, as well as attorneys' fees and costs. 

Since it is not necessary for a relator to have personally suffered any harm to have standing to file an FCA lawsuit, this action provides the potential for a financial benefit. It can often serve as a powerful incentive for anyone with knowledge of government contracting fraud to act as a whistleblower.

What are the Common Schemes of DBE Contractor and Subcontractor Fraud?

Several fraudulent practices can occur in DBE contractor/subcontractor relationships. Understanding these can help individuals recognize potential pitfalls and better prepare their defense.

DBE Contractor and Subcontractor Fraud

Front Companies

One of the most common schemes involves using "front companies." A front company is a DBE that is ostensibly run by disadvantaged individuals but is controlled by non-disadvantaged persons or entities. This manipulation allows non-DBE firms to benefit from contracts reserved for genuine DBEs unlawfully.

Pass-Through Schemes

In pass-through schemes, a DBE is used as a conduit for funds. The DBE is awarded the contract but performs little or no actual work. Instead, the work is done by a non-DBE firm, with the DBE receiving a small fee for its participation.

This undermines the purpose of the DBE program, which is to ensure that disadvantaged businesses gain experience and revenue from government contracts.

Falsification of DBE Status

Another form of fraud involves falsifying the status of a business to qualify as a DBE. This can include misrepresenting the business's ownership, control, or management. Such actions can lead to severe penalties under the FCA if uncovered.

What are the Legal Consequences of DBE Fraud?

Being found guilty of DBE fraud under the FCA can result in severe consequences, including:

  • Fines and Penalties: Companies found guilty of DBE fraud may face treble damages (three times the actual damages) and civil penalties ranging from $11,665 to $23,331 per false claim. These penalties can accumulate quickly, given the scale of government contracts.
  • Criminal Charges: In addition to civil liabilities, individuals and companies may face criminal charges, which can lead to imprisonment and further financial penalties.
  • Debarment: Guilty parties can be barred from future government contracts, which can severely impact their business operations and growth prospects.
  • Reputation Damage: A company's reputation can suffer irreversible damage, affecting relationships with clients, partners, and employees. The negative publicity associated with DBE fraud can lead to a loss of trust and business opportunities.

What are the Defenses Against DBE Fraud Allegations?

If you are criminally accused of an FCA violation, specifically DBE contractor fraud, seeking representation from a federal criminal defense attorney experienced in FCA cases can profoundly impact your case's outcome. A skilled attorney can offer a variety of defense strategies, including the following.

Proving Legitimate DBE Status

One of the first steps in defending against such allegations is to provide evidence that your DBE status is legitimate. This includes demonstrating that disadvantaged individuals truly own, control, and manage the business. Documentation and testimonies from business operations can support this defense.

Defenses Against DBE Fraud Allegations

Challenging the Whistleblower's Claims

In Qui Tam actions, the credibility and motivations of the whistleblower can be scrutinized. It may be possible to demonstrate that the whistleblower has ulterior motives, such as personal gain or vendetta, undermining the reliability of their allegations.

Demonstrating Compliance

Showing that all contracts and business practices comply with federal regulations and DBE requirements can help refute fraud claims. This includes maintaining thorough records and documentation to support the legitimacy of the business operations and the work performed.

Highlighting Lack of Intent

Obtaining a conviction of fraud under the FCA requires proving intent. If it can be shown that any misrepresentation was unintentional or resulted from a misunderstanding of complex regulations, this can be a crucial aspect of the defense. Demonstrating good faith efforts to comply with DBE requirements can mitigate allegations of intentional fraud.

Contact our federal criminal defense law firm for more information. Eisner Gorin LLP is based in Los Angeles, California.

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