New York Contractor Fined $20 Million for Violation of Minority and Women Business Enterprise Practices

Schiavone Construction Co. (“Schiavone”), one of the construction industry’s biggest tunneling firms agreed on November 29, 2010 to pay a $22.4 million settlement of a federal probe into its use of phony companies in place of legitimate minority and women-owned subcontractors on two large New York City infrastructure projects. The two projects included a water filtration plant in the Bronx and subway stations in Manhattan.

The contracts required Schiavone to comply with the New York state MWBE program, established in 1988 to increase participation of minority and women-owned business enterprises in state and federally funded public works projects within. Schiavone was obligated to: (1) make good faith efforts to subcontract with specific percentages of certified DBE and MWBE companies; (2) ensure that the DBE and MWBE subcontractors actually performed the work subcontracted to them; and (3) submit regular reports, called “Utilization Reports,” to the public works owners listing the amounts of contract funds Schiavone paid to each subcontractor, as well as the percentage of contract funds paid to each subcontractor out of the overall contract value for that project.

Schiavone admitted that its employees engaged in a scheme to defraud the public agencies by submitting “Utilization Reports” that falsely represented the work being performed by DBE and MWBE companies, when that work was actually being done by non-DBE and MWBE companies. By engaging in the scheme, Schiavone violated its contractual obligation, prevented certified DBE and MWBE companies from participating in these projects as required by state and federal regulations and thereby denied the work to legitimate DBE and MWBE companies.

Under the terms of its non-prosecution agreement with the government, Schiavone represented that it has undertaken various remedial measures to ensure compliance with the DBE and MWBE programs for its current and future federally funded capital construction projects. The measures which Schiavone agreed to included: (1) establishing a position for an Ethics and Compliance Officer at Schiavone; (2) creating contractor minority compliance manuals, a code of ethics and business conduct, and mandatory compliance courses for its employees; (3) removing the Schiavone employees directly involved with the scheme; and (4) continuing to assist law enforcement in its ongoing investigation of the fraud regarding the projects specified in the settlement agreement. Finally, Schiavone also agreed to pay an excess of $2.3 million in costs incurred by the public agencies in investigating Schiavone’s fraudulent conduct.

This case underscores what some law enforcement officials and analyst is say is a systematic abuse of similar city, state and federal programs in New York City put in place in an effort to level the playing field for companies owned by minorities and women and those certified as disadvantaged. The scheme at the center of the investigation is relatively simple: rather than hire a minority – or women – owned subcontractor or a company the federal government has certified as a struggling business, the contractors run the payroll for their own workers – or paid another subcontractor – through a minority company that served as a “front” or “pass through.” While such crimes do not result in theft of government funds – the money is paid and the work is done – they undermine the intent of the federal, state and local laws, which were written to create opportunities for struggling minority – and women – owned companies. These types of practices contribute to a culture or corruption in the construction industry.

This case should be a wake up call for general contractors, particularly in this economic environment, who may be tempted to cut corners and disregard federal and state statutes concerning the use of DBE and MWBE contractors. As this case demonstrates, there are serious ramifications for playing fast and loose with the well-established statutes in place to provide opportunities for small disadvantaged minority and women business enterprises. The President has focused on small businesses and the promotion of small businesses as the pathway to lead the nation out of its current economic woes. Those businesses that ignore state and federal statutes will likely find themselves on the receiving end of treatment similar to that meted out to Schiavone.

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