Building on a Foundation of Fraud​
Programs intended to benefit minority- and women-owned businesses can be easy targets for fraud.

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​A U.S. federal court jury in Manhattan has convicted a construction firm executive of fraud connected to the reconstruction of the World Trade Center in New York, the Associated Press reports. Prosecutors say Larry Davis and his company DCM Erectors Inc. filed false records attesting that the company complied with rules requiring contractors to hire subcontractors owned by women and minorities. According to prosecutors, the individuals listed as owners of the subcontracting companies were not the legitimate owners of those firms. DCM was awarded more than US$500 million in contracts in 2007 and 2009 to help construct the World Trade Center — which was destroyed in the Sept. 11, 2001, terrorist attacks — as well as an neighboring transportation center.

Lessons Learned

What is it about minority contracting programs that makes them such persistent sources of fraud and corruption? In New York City alone, investigations into fraudulent hiring of minority- and women-owned subcontractors are so common that they have become something of a specialty for local prosecutors. Overall, it's the rare city or state that hasn't endured a scandal tied to well-intentioned minority contracting regulations. So what can be done from an internal auditor's perspective to improve these kinds of programs and reduce the incidence of fraud?

  • Conduct regular audits of business development programs and follow up on their results. The U.S. federal government's program, the 8(a) Business Development Program, is designed to help minority-owned businesses "build their competitive and institutional know-how." But the Office of the Inspector General's (OIG's) most recent April 2016 audit report, focused on program eligibility, found that 30 of the 48 8(a) Program applicants evaluated did not meet one or more areas of eligibility, based on information in the Business Development Management Information System (BDMIS). For 18 of the 48 applicants, additional information was gathered, and, these firms were approved into the program. However, the remaining 30 firms were approved without fully documenting in BDMIS how all areas of concern regarding eligibility raised by lower-level reviewers were resolved. As a result, the 8(a) Program is experiencing a change in leadership, has begun testing a revised application process, and has shifted responsibilities for continuing eligibility reviews.

  • Tighten program controls, monitoring, and penalties for noncompliance. This is how these programs are supposed to work: Minority-owned companies register with local agencies that certify both their capability and the makeup of their ownership. In some cases, contracts are set aside for minority-owned businesses. In others, companies with large contracts are expected to subcontract out some percentage of the work to minority-owned subcontractors. But specific monitoring needs to be done to detect the most commonly found illicit behavior, such as:

    • Using sham minority subcontractors — shell companies "owned" by minorities that don't have the actual capacity to perform the specified work. These faux contracting operations can make it look as though real work and real cash is flowing to minority-owned businesses, when the money is really being passed through to a nonminority-owned company that may or may not do the work.

    • Identifying minority-owned companies that allow their names to be used in documents as the source of supplies when the goods actually come from another, nonminority-owned company.

    Fines and prison sentences also should be increased. In addition, government agencies should require prime contractors to "certify under penalty of perjury" that subcontractors are genuinely minority-owned and are performing work at construction sites, not just "renting" their names to other companies.

Some people might point to broader social factors as the root of this fraud problem, such as a lack of capable minority-owned firms in their industry or city — a state of affairs that can lead contractors to look for shortcuts to satisfy municipal requirements — or argue that affirmative action in contracting is vulnerable to fraud because all parties are eager to welcome good news. But effective policing — including audits of program eligibility, monitoring, and sanctions for noncompliance — can improve the situation significantly.


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