Manhattan DA Promises to Fight MWBE Fraud

Systematic fraud is wracking the city and state programs that prod government agencies to award more contracts to minority- and women-owned business enterprises (MWBEs), Manhattan District Attorney Cyrus Vance Jr. said on Monday while unveiling what he claimed would be a more rigorous, proactive approach to combating abuses.

The proposed new initiatives were outlined in a New York State Supreme Court grand jury report that examined vulnerabilities in the MWBE programs.

The report found that “fraudulent contractors threatens the very goals of the MWBE programs: To develop MWBEs in industries and business in which women and minorities are currently under-represented.”

“The wrongful conduct retards the efforts of fledgling MWBEs to compete on a level playing field and to gain a foothold in the government procurement marketplace,” the report continues, “because the number of contracts available for MWBEs is reduced and the prospect of obtaining experience is diminished.”

To attain certification, an MWBE must be at least 51 percent owned and operated by women or minorities. Billions of dollars on both the state and city level pass through these programs, which are designed to increase participation by female and minority contractors.

The grand jury report issued four major recommendations. First, that a representative with knowledge of the prime contractor, and of each MWBE on contract, be required to certify, on penalty of perjury, that the MWBE actually provided the work sought under the contract.

In the past, some prime contractors created shell companies, known as “pass throughs,” which purport to hire MWBEs while diverting procurement funds elsewhere.

“I think it’s also important that our laws be very clear and unambiguous, and there is some criticism by some that they are not,” Vance Jr. told reporters at roundtable featuring several law enforcement partners, including the MTA inspector general, Port Authority inspector general and commissioner of the New York City Department of Investigation.

Such written affirmations—and the threat of perjury indictment they imply—could serve as an additional weapon in the arsenal of state and city prosecutors.

The report also recommended increasing resources devoted to oversight by certifying and contracting agencies, as well as adding additional punishment levels to the scheme-to-defraud statute under which MWBE fraud cases are prosecuted.

Under the current statute, for instance, a scheme to defraud a victim of $10 million is punishable to the same extent as a scheme to defraud a victim of $10,000.

“Time has shown us that those mega larcenies should be treated as mega larcenies and not, essentially, as minor felony larcenies,” Vance said, “or else business isn’t going to change.”

Finally, the grand jury recommended increasing criminal fines to eliminate the incentive to commit fraud.

The grand jury focused on two cases, involving $10 million in fraud; the Manhattan DA’s office has uncovered $25 million in fraud over the past three to four years.

In October, Gov. Andrew Cuomo announced that 25 percent of state contracts in the previous fiscal year had been awarded to MWBEs—for a total of nearly $2 billion—and raised the state’s target to 30 percent.

New York City, by comparison, only awarded 3.9 percent of its $17.9 billion procurement budget to MWBEs in the 2014 fiscal year.

David Szuchman, executive assistant district attorney, said that over the past decade hundreds of millions of dollars could have been defrauded from MWBE programs.

None of the names of contractors under investigation have been made public; the district attorney did, however, reveal that the grand jury has returned at least one indictment.

The grand jury investigated several prime contractors and subcontractors doing business in New York County, and received testimony from witnesses familiar with contracting agencies, certification processes and owners and employees of MWBEs. The investigation revealed criminal conduct.

MTA Inspector General Barry Kluger, also present at the roundtable, lamented the fact that, despite several recent high-profile cases brought against major contractors—in which substantial fines were levied, and mandatory compliance programs instated—illegal activity appears to have continued unabated.

In recent years, Schiavone Construction and Skanska USA Civil Northeast have agreed to multi-million-dollar settlements with federal prosecutors in the face of investigations into alleged subcontracting fraud.

In 2013, the Manhattan district attorney announced a $10 million settlement with Schlesinger-Siemens Electrical for defrauding the city, with Vance saying at the time that it “overstated the participation of minority businesses.”

City Department of Investigation Commissioner Mark Peters, another roundtable participant, said that fraud can affect multiple government programs at the same time, and there are instances of one person using the same shell MWBE to secure contracts from the MTA, Port Authority and city.

“One of the things that we’ve all been doing with the district attorney,” he said, “is trying to do a better job of coordinating our efforts, since if somebody is defrauding the city, there is a good bet they are going to try to defraud the Port or the MTA.”

In commending the Manhattan DA, Port Authority Deputy Inspector General Steven Pasichow noted that most prosecutors “don’t get into the business of helping prevent fraud and doing reforms.”

The modus operandi of inspector generals has traditionally been, he said, “Let’s detect, let’s get prosecuted, and move on.”

“Increasingly, we are trying to engage in preventative measures, whether it’s economic fraud or street crime,” Vance said. “Obviously, if we can prevent a crime from occurring that is a far better end result than prosecuting one once it’s happened.”