As MWBE support rises, calls grow for tougher action on fraud

When politicians talk about government programs to boost minority- and women-owned businesses, they tend to talk about the numbers. Gov. Andrew Cuomo, who has garnered praise for more than doubling the share of state contracts going to MWBEs to 23 percent, is aiming for an ambitious utilization target of 30 percent. New York City Mayor Bill de Blasio, on the other hand, has faced questions about his commitment to the city’s program, which awarded just 5.3 percent of public contracts to MWBEs in fiscal year 2015. De Blasio has established an MWBE target of his own, promising that $16 billion will flow through the city’s program in the coming decade.

While ambitious targets can help galvanize action, they also create incentives to game the system – including through criminal fraud – which can artificially inflate utilization rates.

In 2014, a grand jury impaneled by Manhattan District Attorney Cyrus Vance found “systematic criminal conduct” within MWBE programs in the construction industry. With the release of those findings, Vance, joined by Maya Wiley, counsel to de Blasio, and New York City Department of Investigations Commissioner Mark Peters, pledged to rigorously root out such abuses.

Though multiple sources said that investigations are ongoing, there appear to have been no high-profile indictments for MWBE fraud since the grand jury released its 2014 report. 

“People still don't take this seriously because, in my estimation, this is about minorities,” said Bertha Lewis, president of The Black Institute. “If a bunch of big white companies were being defrauded, we would see some real action.”

One of the more common fraudulent schemes involves MWBE subcontractors serving as shell companies, or “pass-throughs,” with public dollars circling through them back to the prime contractor. Investigators have also uncovered cases in which the actual subject matter expertise of a certified subcontractor belongs to an individual other than the purported principal.

“Where there’s smoke, there’s fire,” said Katherine Lemire, a former federal prosecutor who is now president of an investigations firm that has been selected by a state agency to conduct compliance reviews of its MWBE contracts. “Once you start to dig, you can spot the fraud pretty quickly. This does not take an army of forensic accountants to figure out.”

Agencies may also fail to detect abuses due to lack of resources dedicated to oversight. "It's impossible for the city and the state to police this issue,” Lemire said. “They don't have endless budgets. They don't have endless compliance staff housed within each agency that can make sure that every MWBE out there is really what it purports to be."

Patrick Muncie, a spokesman for the Manhattan district attorney, described the problem of MWBE fraud as “persistent.”

According to Steven Pasichow, the Port Authority’s deputy inspector general, “there are quite a few contractors who do perpetrate the fraud to meet the goals that the program requires.”

While conceding that fraud within government programs is a “very real issue,” Rev. Jacques DeGraff, chairman of the city’s School Construction Authority Diversity Council and a longtime MWBE advocate, argued that certain actors depict the problem as more pervasive than it truly is – particularly those who favor “business as usual.”

“The same people often say, ‘We’re concerned about capacity (of MWBEs),’” DeGraff said. 

The 2014 grand jury report recommended two legislative actions that could deter MWBE fraud: adding gradations to the scheme-to-defraud statute (under which many MWBE fraud cases are prosecuted), so that criminal charges are commensurate with the magnitude of the offense, and increasing criminal fines to remove the profit incentive from fraud.

Under the current statute, a scheme to defraud a victim of $10 million is punishable to the same extent as one 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 – or else business isn’t going to change,” Vance said in 2014.

In the few instances that multimillion-dollar fines have resulted from investigations of MWBE fraud – including cases brought against Schiavone Construction and Skanska USA Civil Northeast – the penalized companies remained eligible for public contracts with minority participation requirements.

“It’s like jaywalking or something,” Lewis said. “There is no serious enforcement on these programs – none at all. You’ve got to put some teeth into this, and on the state level, Gov. Cuomo, and on the city level, Mayor de Blasio, have failed to enact meaningful oversight.”

According to Muncie, the Manhattan district attorney’s office worked closely during the last legislative session with state Assemblyman Robert Rodriguez on a bill to address both the scheme-to-defraud statute and larger criminal fines for MWBE fraud. Yet to be introduced, the bill “remains a priority for us in the current session,” Muncie said.

When coupled with criminal schemes, recent revelations that contracting authorities misreported MWBE participation data have cast a degree of doubt over official utilization figures. 

In a September 2015 audit of the Metropolitan Transportation Authority, the state comptroller’s office found that “weakness in controls over MWBE reporting continue and have resulted in inaccurately reported utilization numbers as well as an increased risk of fraud.” The audit also found that the MTA did not follow its own oversight requirements regarding site visits and inspections.

A second state comptroller audit found that the Dormitory Authority of the State of New York, through double counting and other reporting flaws, had “overstated its MWBE contract participation” by millions of dollars.

“You really do have to be an archeologist to get under (the state’s) numbers,” Lewis said.

Like subcontracting fraud and misreported data, advocates believe that loopholes in program requirements have a similar effect of holding back historically excluded groups and limiting job creation in minority communities.

Contracting agencies, for instance, can waive MWBE participation mandates on projects – such as those requiring hard-to-find specializations or undertaken in localities with homogenous populations – in which prime contractors are unable to find a qualified and available MWBE subcontractor. However, some question the ease with which such waivers are sometimes granted, and believe that instances in which contractors do not undertake “good faith” efforts to locate MWBE subcontractors slip through the cracks. There have also been reports of contractors delaying and failing to pay MWBEs, or even removing them from projects without notifying the responsible agencies.

“We are confident in our process certifying MWBEs,” Wiley, de Blasio’s counsel, told City & State in a statement. “We take multiple steps to ensure that this program will not be taken advantage of. Any case of fraud is taken seriously, and we use all legal resources to make sure that those behind fraudulent acts are penalized.” 

According to City Hall, 176 site visits were conducted in the 2015 fiscal year after MWBE applications or supporting documentation raised questions. Sixteen businesses were subsequently denied certification.

The Cuomo administration said that companies participating in the state program can be assessed damages for violating a contract, but that relatively few instances of fraud have been discovered, and of the complaints that have arrived through the state's anonymous fraud hotline, no instances of fraud have thus far been substantiated.

“We are certainly supportive of increasing penalties, or creating additional systems to prevent fraud,” said Alphonso David, the counsel to the governor. “The goal is to ensure that we have the best and most integral state, county, and local systems to support and sustain MWBE growth.”

Given last month’s announcement that the state will invest $100 billion in public infrastructure – a plan that would create 250,000 jobs, according to the Cuomo administration – scrutiny of subcontracting oversight in MWBE programs is unlikely to diminish in the coming years.

“We didn’t create the (MWBE) fronts, and we don’t finance the fronts, so we’ve got to work together because it’s a stain on the program,” DeGraff said.