A Survey of State Practices for Protecting Transportation Agencies Against Construction and Disadvantaged Business Enterprise Fraud Including Use of Contractor Suspension and Debarment Procedures (2007)

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NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES I. Introduction Nationally, transportation is a multi-billion dollar industry. Each year, billions of dollars are spent on road, highway, bridge, and public transit projects. In Fiscal Year (FY) 2005, the United States Department of Transportation (USDOT) had total budget resources of $114 billion, an increase of 6.5% from FY 2004 levels of $107 billion.1 Congress, through the 1998 Transportation Equity Act for the 21st Century (TEA-21), set aside more than $200 billion for transportation projects (approximately $35 billion per year), which was passed on to the states through the U.S. Department of Transportation.2 State and local governments provide yet another major source for transportation project funding. 3 Unfortunately, the potential for fraud in an industry with a fiscal impact of this magnitude is substantial unless closely monitored. For the USDOT, fraud is likely to cause the diversion of critical funds from infrastructure programs, thus subverting the efforts of regulators and undermining the integrity of important public policy.4 Additionally, when allocated funding is lost to fraudulent activities, there are fewer resources available for programmed transportation projects. To provide governmental agencies with tools to combat fraud, Congress, in 1863, enacted the False Claims Act (FCA). It has been asserted that the FCA is the single most important tool U.S. government and taxpayers have to recover the billions of dollars stolen through fraud by U.S. government contractors every year.5 The qui tam6 action is the primary FCA method of enforcement. The 1986 amendments to the FCA strengthened qui tam actions by creating incentives for private citizens with evidence of fraud to commit their time and resources to accompany the government’s efforts.7 By doing 1The Department of Transportation’s Performance and Accountability Report for Fiscal Year 2005, available at http://www.dot.gov/perfacc2005/mdanda.htm - about. 2 Rich Stolz, Transportation Planning & Its Relationship to Community, PCJ, No. 45, Article 238, Winter 2002. 3See Statistical Abstract of the United States, U.s. Census Bureau, 2007. Table 425, p. 272. 4 Supra. Note 2. 5 Taxpayers Against Fraud (TAF) Education Funds - What is the False Claims Act?, available at http://www.taf.org/whyfca.htm (lasted visited May 1, 2007) 6 Qui Tam is short for the Latin phrase ‘Qui Tam pro domino rege quam pro se ipso in hac parte sequitur,’ which means ‘who pursues this action on our Lord the King’s behalf as well as his own,’ Vermont Agency of Natural Resources v. US ex rel. Stevens, 529 US 765, 769, 120 S. Ct. 1858, 1860, 146 L. Ed. 2d 836 (1999) n.1 (2000) (citing 3 W. BLACKSTONE, COMMENTARIES ON THE LAW OF ENGLAND 160 (768)). A “Qui Tam” action is an action brought under a statute that allows a private person (informer or relator) to sue for a penalty, part of which the government or some specified public institution will receive or share with the relator. Under the FCA, the Attorney General will investigate the claim and take one of three courses of action: (1) join the government to the suit as a party; (2) decline to join and allow the private party to continue; or (3) decline to join and block the suit. 31 USC § 3730. 7 False Claims Act Amendments of 1986, Pub. L. 99-562, 100 Stat. 3153, October 27, 1986. - 1 -

NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES so, Congress created a powerful public-private partnership for uncovering fraud.8 From 1987 to 2002, the federal government successfully recovered over $6 billion using FCA qui tam actions. Moreover, the General Accounting Office (GAO) has estimated that the FCA has deterred over $300 billion in potentially fraudulent contracts from 1986 to 1998.9 Total recoveries since the 1986 amendments are now in excess of $17 billion, with nearly $1 billion recovered in the first quarter of FY 2006.10 Most states, in realizing the importance of controlling fraudulent activities, have taken notice of the federal FCA and have adopted their own False Claims Act. Similarly, Disadvantaged Business Enterprise (DBE) fraud is a growing concern in the transportation industry. The State Departments of Transportation (DOTs) have primary responsibility for the certification of DBEs, pursuant to the DBE Regulations.11 One example of DBE fraud occurs when companies and owners that do not qualify as eligible DBEs use false statements to obtain certification.12 Another example is where the contractors create forged documents and may be inappropriately certified as Small and Disadvantaged Business Enterprises (SDBEs).13 Likewise, many SDBE-eligible firms reportedly have served as fronts for ineligible firms.14 Fraudulent activities have also occurred when prime contractors used 8 Taxpayers Against Fraud (TAF) Education Funds - What is the False Claims Act?, available at http://www.taf.org/whyfca.htm (lasted visited May 1, 2007). 9 US Department of Justice, Fraud Statistics-Overview: October 1, 1986 – September 30, 2004, available at http://www.taf.org/fcastatistics2006.pdf. The recoveries were received from 3,954 Qui Tam actions. Further, this amount does not include $276 million received in Qui Tam actions where the US declined to intervene. 10 Id. 11 49 CFR 23 and 49 CFR 26. 12 See 49 CFR part 26, app. A (2002). 13 Andre Savvides of NY, owner and officer of EXCEL, Mineola, NY, was charged in U.S. District Court in Islip, NY with conspiring with Disadvantaged Business Enterprise (DBE) subcontractors to create false DBE documentation for submission to the NYS Metropolitan Transportation Authority (MTA). The MTA awarded EXCEL a $37.9 million federally funded project to rehabilitate the Broadway/East New York Subway Complex based on the false documentation. Subsequent to receiving the award, Savvides allegedly created additional false documentation in an effort to uphold the appearance of meeting its DBE requirements. This investigation was conducted by the Federal Construction Task Force, Long Island, NY, which includes OIG. On April 26, 2007, Savvides plead guilty to money laundering conspiracy. As a part of the plea agreement he forfeited $393,576 to the government. See U.S. v. Andre Savvides, Case No. 2:2005cr00356SJ, N.Y.E.D.., (filed May 5, 2005). 14 DOT Inspector General recently reported that Irving Walston, of Riverhead, NY, owner of Ego Spirit, Inc. (Ego), a certified DBE firm in Cambria Heights, NY was sentenced in U.S. District Court, Central Islip, NY to three years probation and over $15,000 in fines and back taxes. Walston pled guilty in July 2003 to conspiracy to commit mail fraud in connection with tax returns which allegedly improperly documented income and expenses on fraudulent DBE contracts valued at about $1.4 million and with Davis-Bacon Act violations. Watson also was alleged to have used Ego as a ‘front’ DBE, receiving payments from other firms which actually performed the work under DOT- funded construction contracts Ego held. Debarment of Walston by FHWA is under consideration. This investigation was conducted jointly with the Federal Construction Fraud Task Force, Long Island, NY. Also, L&K Electric Supply Company of Birmingham, AL, and company President Adriene Balton were sentenced in U.S. District Court in Norfolk, VA, to pay $228,056 in fines, restitution, and assessments for falsifying four applications submitted to - 2 -

NCHRP 20-6, STUDY TOPIC 13-1 A SURVEY OF STATE PRACTICES FOR PROTECTING TRANSPORTATION AGENCIES AGAINST CONSTRUCTION AND DISADVANTAGED BUSINESS ENTERPRISE FRAUD INCLUDING USE OF CONTRACTOR SUSPENSION AND DEBARMENT PROCEDURES companies that were not eligible DBEs to receive government funding and reach contract goals. From FY 2000 to FY 2004 USDOT has had 131 indictments, 96 convictions, and over $73 million in fines, restitution, and other recoveries of DBE fraud.15 Lastly, in order to curb fraud, waste, and abuse in federal programs, and to increase agency accountability, and ensure consistency among agency regulations concerning debarment and suspension of participants in Federal programs, Executive Order 12549 (February 18, 1986)16 and Executive Order 12689, (August 16, 1989)17 both entitled, "Debarment and Suspension," were established. These orders provide guidance for agency suspension and debarment activities. Additionally, the U.S. Department of Transportation's (USDOT) implementing regulations in 49 CFR, Part 29 adopted a government-wide system of debarment and suspension for DOT non-procurement activities.18 The Government debarment and suspension procedures are intended to prevent poor performance, waste, fraud and abuse in federal procurement and non-procurement actions. The General Services Administration (GSA) maintains the list of parties that are debarred, suspended, or excluded from doing business with the federal government. 19 As stated by USDOT Inspector General Kenneth Mead at the 2004 National Fraud Awareness Conference, “Today, fraud in highway and transit programs is increasingly sophisticated and crosses geographic boundaries, which is precisely why effective prevention, detection, and prosecution is achievable only through a well-coordinated, multi-disciplined, and intergovernmental approach.”20 the Virginia Department of Transportation for disadvantaged business enterprise (DBE) certification. In September, Balton admitted she and her company committed fraud in order to win a $14.7 million contract that counts toward the state's DBE contract goal. L&K is barred from participating in the DBE program for five years. The case was investigated by OIG and the FBI. See U.S. v. Watson, Case No. 2:2003cr00184, N.Y. E.D. (December 16, 2004)(This case is sealed, but the DOT/OIG summary is available at http://www.oig.dot.gov/item.jsp?id=1459 (last visited 6/18/2007) 15 Remarks of Department of Transportation Inspector General Kenneth M. Mead, National Fraud Awareness Conference: Highway Construction and Surface Transportation, June 8, 2004, available at http://www.oig.dot.gov/item.jsp?id=1342 (push link “full document’) (last visited 6/19/2007). 16 51 FR 6370, February 18, 1986,, 3 CFR 1986, Comp. p.189. 17 54 FR 34131, August 18, 1989, 3 CFR 198 Comp. p. 235. 18 49 CFR Part 29, §29.100. It also provides for reciprocal exclusion of persons who have been excluded under the Federal Acquisition Regulation, and provides for the consolidated listing of all persons who are excluded, or disqualified by statute, executive order, or other legal authority. This part satisfies the requirements in section 3 of Executive Order 12549. 19 http://www.epls.gov. 20 Remarks of Department of Transportation Inspector General Kenneth M. Mead, National Fraud Awareness Conference: Highway Construction and Surface Transportation, June 8, 2004, available at http://www.oig.dot.gov/item.jsp?id=1342 (push link “full document’) (last visited 6/19/2007). - 3 -