DOT Office of Inspector General Audit of DOT’s Disadvantaged Business Enterprise (DBE) Program

1. Federal Audit Executive Council Procurement Training Conference Washington, DC DOT Office of Inspector GeneralAudit of DOT’s Disadvantaged Business Enterprise (DBE) Program June 12, 2013

2. Audit Background • The DBE program • Created to help socially and economically disadvantaged individuals who own small businesses participate in contracting opportunities created by DOT financial assistance programs. The DBE program • Unique to the transportation sector and covers contracts awarded by state highway agencies, airports, transit authorities, and other state/local agencies that receive DOT funds. • DOT, state, and local transportation agencies share unique roles and responsibilities in administering the DBE program. • DOT’s annual distribution to DBEs during fiscal years 2009 to 2012 averaged almost $4 billion, a period during which DBE fraud cases increased significantly.

3. Audit Objective • Our audit objectives were to determine whether the Department: • Provides adequate DBE program management, • Operating Administrations and recipients sufficiently oversee and implement the DBE program, and • Achieves its program objective to help develop DBEs to succeed in the marketplace. • We conducted the audit April 2011 through October 2012.

4. Why Did We Do This Audit This was a self-initiated audit that was sparked through coordination efforts between our audit and investigation sides of the house. What “red flags” indicated the need for this audit: • The significant amount of funds distributed through DOT's nationwide DBE program magnifies the risks of potential fraud and heightens the need for effective oversight. • Our investigators recently experienced an spike in their DBE fraud caseload. • From October 1, 2003 through September 30, 2008, our investigations of DBE fraud allegations resulted in 49 indictments, 43 convictions, nearly $42 million in recoveries and fines, and 419 months of jail sentences. From 2009 to 2010, the number of open OIG investigations related to DBEs increased by almost 70 percent. DBE investigations accounted for approximately 25 percent of OIG's open procurement/grant fraud caseload in 2010. Also, DBE fraud represents over one-third of OIG's open ARRA cases in 2010. • Our previous DBE fraud investigations indicate weaknesses in states‘ program administration and oversight practices, especially regarding the certification process and monitoring of DBE performance of contracts at project work sites. • Our previous work and audits identified systemic weaknesses in DOT program oversight. • We have never conducted a systematic review of the Department's administration and oversight of its DBE program in its 30+ years of existence.

5. Audit Results: The Department does not provide effective program management for its multibillion-dollar DBE program • The Department has not issued comprehensive, standardized DBE guidance or provided sufficient training to its recipients responsible for implementing the nationwide DBE program. • The Department has not established a single line of accountability to manage the multibillion-dollar program. • Achievement of regulatory DBE objectives is not assessed. • Lack of accurate spending and award data for the DBE program. • Limited communication with its state and local recipients.

6. Audit Results: DOT’s Operating Administrations and its Recipients Do Not Adequately Oversee or Implement the DBE Program • DOT’s Operating Administrations (OAs) do not ensure effective program implementation because their oversight practices are being carried out inconsistently and are limited in scope. • The Department leaves all responsibility for overseeing the recipients’ DBE programs to the OAs; however, the Department does not regularly assess the effectiveness of the OA’s oversight practices. • Weak recipient DBE practices increase the risk of waste, fraud, and abuse within the program. • State certification practices showed weaknesses that increase the risk that ineligible firms will be certified as DBEs. • Recipients do not effectively monitor DBEs at project work sites to ensure the DBE is conducting the work they were contracted to perform. • Recipients are responsible for implementing the program in compliance with DOT’s DBE regulations, but are grossly understaffed to carry out these duties.

7. Audit Results: The Department has limited success in achieving its regulatory program objective to develop DBE firms to succeed in the marketplace outside the program • Recipients do not adequately develop DBE firms to succeed in the marketplace. • Less than 20% of the certified DBEs in the 6 states we visited have received work as a DBE on a federally funded project. • Larger DBE firms tend to develop relationships with prime contractors as they demonstrate they can perform the work. Then the same DBEs get used over and over again by the prime contractors • DOT’s DBE program does not have a term limit on participation. We found DBEs that have been in the program over 10 years, some since the 1980s and some having gotten none or only one contract as a DBE.

8. DBE Fraud The majority of our OIG Investigator’s DBE fraud cases are due to a lack of project oversight and DBEs acting as “front companies”. • In April 2012, a Pennsylvania contractor owner was found guilty on 26 of 30 charges, including conspiracy to defraud the U.S. DOT, in the largest reported DBE fraud in the nation’s history. The contractor owner was convicted of participating in a 15-year-long scheme involving over $136 million in government contracts in which he and his co-conspirators diverted over 300 construction contracts reserved for DBEs to a non-DBE firm and its wholly-owned subsidiary where the contractor owner was President, CEO, and partial-owner. They executed this scheme by using a small Connecticut highway construction firm as a “front” company to obtain these lucrative government contracts. The contractor owner faces up to five years in prison on the conspiracy count; up to 20 years in prison on each count of wire and mail fraud; and up to 10 years each on the money laundering and money laundering conspiracy counts. He also faces $250,000 in fines and mandatory restitution on each conviction.

9. DBE Fraud • The Washington state Department of Transportation came under fire in 2012 when an investigation spearheaded by a Seattle television news station reported widespread fraud and a pattern of poor state agency oversight in the state’s DBE program. As reported, a DBE owned by an ex Seattle professional sports figure used its status as a DBE to get contract awards, and gave the work to a large non-DBE for a cut of the contract price. State investigators reportedly found that the DBE did not have the equipment, employees, or the expertise to perform the work it contracted for, and that no DBE employees were showing up on the job site. The owner of the large non-DBE admitted that his firm did all the work, while the DBE was on the job in name only. Instead of taking sanctions, the state reportedly re-certified the DBE. Follow-up investigations reportedly found similar patterns of behavior on numerous other projects and found the state’s certifying agency allegedly ignored multiple instances of companies being allowed to participate in DBE programs even though they never met the eligibility requirements, no longer qualified because they exceeded the maximum net worth requirements, or were DBE’s in name only who did no meaningful work on the federally–funded state projects committed to them. The controversy led to the resignation of the director of the state certification agency in May 2012, and is currently under investigation. • FBI investigations identified “front company” fraud in contracts awarded in the 9/11 terrorist attack aftermath.

10. DBE Fraud Certification weaknesses also contribute to DBE fraud, such as falsifying documents to meet DBE eligibility criteria. • In May 2013, the Department of Justice reported an Idaho-based construction contractor has been indicted on charges related to a scheme to fraudulently obtain DOT’s DBE and SBA’s 8(a) certifications. According to the allegations, between 2000 and 2012, the president and majority stockholder of the firm took steps to lower her personal net worth to enable her to successfully apply for the DBE programs. To meet DBE eligibility requirements and support the DBE application, the president allegedly submitted false and fraudulent personal and company tax returns along with false personal financial statements, purposefully altered or falsified the company’s financial records, and concealed her role in other business entities that dealt the DBE company. The government contends the company received more than $2.5 million in government contracts from its fraudulent SBA 8(a) status and over $6 million in contracts from its DBE status. If convicted, Martin faces prison time, fines, and forfeiture of more than $9 million. In FY 2011 and 2012 combined, our investigators reported over $86 million in recoveries from DBE fraud cases, with 9 indictments and 11 convictions. DBE fraud cases made up 29% of all of our OIG grant and procurement fraud investigations in FY 2012, and currently represent 32%.

11. Audit Report • We made 8 recommendations to the Office of the Secretary to enhance program management, improve the implementation and oversight of the program, and help ensure that DBE funds are used to meet program objectives. • Although OST concurred or partially concurred with all 8 of our recommendations, we were only able to resolve 3, as OST’s planned action for each of the remaining 5 did not meet the intent of the recommendation. • OST’s response to several recommendations was to allow OST 2 years to make a “determination” whether or not they would implement our recommended action. • Our final report was published on April 23, 2013.

12. Audit Impact • On May 15, 2013, Congress sent a letter signed by 30 members to Secretary LaHood stating Congress is “deeply concerned” with the IG’s report conclusions that the Department is not effectively managing its multi-billion dollar DBE program. • The letter also states Congress is concerned that DOT’s response to the IG’s recommendations suggests that DOT fails to grasp the seriousness of the IG’s findings and the consequences DOT’s current practices are having on DBEs and potential DBEs. • In the letter, Congress inquires what steps DOT will take to improve its oversight of the program and ensure all of the IG’s recommendations are addressed “asap”. • Congress requested DOT provide them a briefing as soon as possible and, by the end of the month, provide a detailed plan that addresses each IG recommendation, including a specific date the recommendation will be implemented and the criteria DOT will utilize to assess the effectiveness of its management improvements.

13. Watchdog: Millions lost annually by program for disadvantaged small businesses Audit Impact Your work can catch the attention of media and press!!! • Watchdog.org • Lexology.com • Natlawreview.com • The Washington Examiner Millions Lost Annually by Program for Disadvantaged Small Businesses DOT OIG report: weak and splintered management of DBE program leaves it “exposed to billions of dollars in fraud, waste and abuse” Weak and Splintered Management of DBE Program Leaves It “Exposed to Billions of Dollars in Fraud, Waste and Abuse” Inspector General Criticizes DOT DBE Program

14. Making an Impact in Your Agency • Look at large scale operations and programs in your agencies. • High dollar expenditures • Nation wide audience or impact • Coordinate and collaborate with your investigators. • Identify high-risk areas • Look for recent up-swings in fraud or risk potential • Look for operations and programs in your agency that have not been reviewed by the IG recently or ever before. • Develop the big impact of your findings from the top.

15. Contact & Additional Info • Terry Letko — Program Director • Acquisition & Procurement Audits, U.S. DOT OIG, 202-366-1478, Terrence.J.Letko@oig.dot.gov • Ann Wright — Project Manager • Acquisition and Procurement Audits, U.S. DOT OIG, 202-366-1433, Ann.Wright@oig.dot.gov • Jill Cottonaro — Senior Analyst • Acquisition and Procurement Audits, U.S. DOT OIG, 202-366-3831, jill.cottonaro@oig.dot.gov • Nick Coates — Legal Counsel • Office of General Counsel, U.S. DOT OIG, 202-366-2923, nicholas.coates@oig.dot.gov For more information on DOT’sOffice of Inspector Generalhttp://www.oig.dot.gov