The United States Department of Transportation (hereinafter “USDOT” or “DOT”) distributes substantial funds each year to finance state and local construction, public transit, and airport agency projects. Recipients of these funds are primarily state highway, transit and airport agencies. Recipients of Federal Highway Funds, Federal Transit Funds and Federal Airport Funds (collectively “DOT funds”) are required by statute to expend at least 10% of the DOT funds they received with “small business concerns owned and controlled by socially and economically disadvantaged individuals” – commonly referred to as “Disadvantaged Business Entities” (hereinafter “DBEs”).
Objectives of the Disadvantaged Business Entities
The objectives of the DBE program are:
- To ensure nondiscrimination in the award and administration of DOT-assisted contracts in the Department’s highway, transit, and airport financial assistance programs;
- To create a level playing field in which DBEs can compete fairly for DOT-assisted contracts;
- To ensure that the Department’s DBE program is narrowly tailored in accordance with applicable law;
- To ensure that only firms that meet this part’s eligibility standards are permitted to participate as DBE’s;
- To help remove barriers to the participation of DBEs in DOT-assisted contracts;
- To assist the development of firms that can compete successfully in the marketplace outside the DBE program; and
- To provide appropriate flexibility to recipients of Federal financial assistance in establishing and providing opportunities to DBEs.
To ensure nondiscrimination in the award and administration of DOT-assisted contracts in the Department’s highway, transit, and airport financial assistance programs;
Recipients of DOT funds must develop and implement a DBE program that conforms to DOT standards set forth in 49 C.F.R. Part 26. To participate in a DBE program, a small business owned and controlled by socially and economically disadvantaged individuals must certify that they are eligible for DBE status pursuant to the certification standards of 49 C.F.R. Part 26. Thus, in order to become certified as a DBE, entities are required to participate in DOT’s Unified Certification Program (UCP), administered by each state. Under this program, primary responsibility for enforcing the certification standards in Part 26 is delegated to each state.
Furthermore, DBE certification is required to be recognized by all DOT fund recipients in that state. DBE certification is valid for a period of at least three years, unless its certification is removed.
Recipients of DOT funds agree to abide by the regulations set forth in 49 C.F.R. Part 26 in dispersing funds to DBEs through awards of contract and subcontract work, to remain eligible to receive federal funds. Indeed, each DOT contract or subcontract must contain affirmative assurances that the contractor agrees to abide by DOT regulations in 49 C.F.R. Part 26 as a material condition of the contract. Specifically, each contract must include the following provision:
The contractor, sub recipient or subcontractor shall not discriminate on the basis of race, color, national origin, or sex in the performance of this contract. The contractor shall carry out applicable requirements of 49 C.F.R. Part 26 in the award and administration of DOT-assisted contracts. Failure by the contractor to carry out these requirements is a material breach of this contract, which may result in the termination of this contract or such other remedy as the recipient deems appropriate.
As discussed more specifically below, each contractor’s compliance with federal regulatory requirements in 49 C.F.R. Part 26, including the standards for certifying eligibility as a DBE, is a material condition of payment under any contract awarded as part of the DBE program.
DBE Certification Requirements
The criteria to be certified as a DBE are codified in 49 C.F.R. Part 26. The DBE applicant must meet each and every one of these requirements to be eligible for certification. Further, if certification is granted, the certified DBE must continually verify that the business continues to meet the DBE eligibility criteria. Every DBE applicant must attest to the accuracy and truthfulness of the information on its application by either a notarized affidavit or by a declaration signed under penalty of perjury. The Affidavit of Certification form (“Affidavit”) mandated by USDOT is prefaced by the following statement:
A MATERIAL OR FALSE STATEMENT OR OMISSION MADE IN CONNECTION WITH THIS APPLICATION IS SUFFICIENT CAUSE FOR DENIAL OF CERTIFICATION, REVOCATION OF A PRIOR APPROVAL, INITIATION OF SUSPENSION OR DEBARMENT PROCEEDINGS, AND MAY SUBJECT THE PERSON AND/OR ENTITY MAKING THE FALSE STATEMENT TO ANY AND ALL CIVIL AND CRIMINAL PENALTIES AVAILABLE PURSUANT TO APPLICABLE FEDERAL AND STATE LAW.
The DBE applicant then swears to the truthfulness of the information in the application with the following statement, including that it provided all material information regarding the entity’s eligibility for DBE status:
I swear or affirm under penalty of law that … I have read and understood all of the questions in this application and that all of the foregoing information and statements submitted in this application and its attachments and supporting documents are true and correct to the best of my knowledge, and that all responses to the questions are full and complete, omitting no material information. The responses include all material information necessary to fully and accurately identify and explain the operations, capabilities and pertinent history of the named firm as well as the ownership, control, and affiliations thereof.
The Affidavit requires the DBE Applicant to specifically recognize that “the information submitted in [the] application is for the purpose of inducing certification approval by a government agency.” The Affidavit also requires the DBE Applicant to make ongoing reports to “the prime contractor, if any, and the Department recipient agency, or federal funding agency” of “current, complete and accurate information regarding (1) work performed on the project; (2) payments; and (3) proposed changes, if any, to the foregoing arrangements [in the Application].”
Further, the DBE Applicant “agrees to provide written notice to the recipient agency or United Certification Program (UCP) of any material change in the information contained in the original application within 30 calendar days of such change (e.g., ownership, address, telephone number, etc.).” Federal regulations specify that this written notice be provided by sworn affidavit or declaration under penalty of perjury, and include supporting documentation, explaining any change in circumstances affecting its ability to meet the size, disadvantaged status, ownership, or control requirement of this part of any material change in the information provided in the application. The DBE Applicant specifically acknowledges that misrepresentations regarding its DBE status affects the decision to continue to contract with the entity and to maintain its certification status :
I acknowledge and agree that any misrepresentations in this application or in records pertaining to a contract or subcontract will be grounds for terminating any contract or subcontract which may be awarded; denial or revocation of certification; suspension and debarment; and for initiating action under federal and/or state law concerning false statements, fraud or other applicable offenses.
A certified DBE must annually sign a sworn affidavit or unsworn declaration under penalty of perjury affirming that it continues to meet the DBE eligibility criteria. DBEs must again certify their compliance with the regulations regarding eligibility when seeking payment for work performed. Compliance with the certification and other requirements of the DBE Program is a material condition of payment of DOT funds.
DBE “Control” Requirements.
One of the most common types of fraud committed against the government in these types of contracts concerns who actually controls the DBE. Some unscrupulous companies will assert that a person that qualifies as a socially and economically disadvantaged person controls the business, but in actuality another party is running the operation. In determining whether socially and economically disadvantaged owners control a firm, all of the facts in the record must be considered, viewed as a whole. Socially and economically disadvantaged owners must possess the power to correct or cause the direction of the management and policies of the firm and to make day-to-day as well as long-term decisions on matters of management, policy and operations. Individuals who are not socially and economically disadvantaged may be involved in a DBE firm as owners, managers, employees, stock holders, officers and/or directors. However, such individuals must not possess or exercise the power to control the firm or be disproportionately responsible for the operation of the firm. In essence, you may not have a “figure head” for the company and another party running the firm.
The managerial role of the socially and economically disadvantaged owners in the firm’s overall affairs must be such that the recipient can reasonably conclude that the socially and economically disadvantaged owners actually exercise control over the firm’s operations, management, and policy. In order to be viewed as controlling a firm, a socially and economically disadvantaged owner cannot engage in outside employment or other business interests that prevent the individual from devoting sufficient time and attention to the affairs of the firm to control its activities. For example, absentee ownership of a business and part-time work in a full-time firm are not viewed as constituting control.
Prohibition of “Pass-Through” Arrangements.
Another type of common fraud related to DBE contracts on DOT projects concerns “pass-through” arrangements. The DOT regulations entitled “Participation by Disadvantaged Business Enterprises in Department of Transportation Financial Assistance Programs” are intended to provide opportunities for businesses owned by socially and economically disadvantaged individuals, such as minorities and/or women, possessing the required skills to perform work on construction projects funded, at least in part, by the federal government. The regulations are codified at 49 C.F.R., Part 26 (the “DBE Regulations”). They are designed to “ensure nondiscrimination in the award and administration of DOT-assisted contracts in the Department’s highway, transit, and airport assistance programs.”
The DBE Regulations require that every contract that a DOT funding recipient signs with a contractor include an assurance by the contractor that “[t]he contractor … shall carry out applicable requirements of [the DBE Regulations] in the award and administration of DOT-assisted contracts.” The DBE Regulations further state that “[f]ailure to carry out these requirements is a material breach of this contract, which may result in the termination of this contract or such other remedy as the recipient deems appropriate.”
The DBE Regulations provide that payments made to a DBE contractor may be counted toward DBE goals “only if the DBE is performing a commercially useful function of that contract.” A “commercially useful function” is performed when a DBE is “responsible for the execution of the work of the contract and is carrying out its responsibilities by actually performing, managing, and supervising the work involved.” To perform a “commercially useful function,” the regulations require that the DBE “be responsible, with respect to materials and supplies used on the contract, for negotiating price, determining quality and quantity, ordering the material and installing (where applicable) and payment for the material itself.”
The DBE Regulations specifically prohibit “pass-through” arrangements. Thus, a DBE does not perform a commercially useful function “if its role is limited to that of an extra participant in a transaction, contract, or project through which funds are passed in order to obtain the appearance of DBE participation.” If a DBE does not perform or exercise responsibility for at least 30 percent of the total cost of its contract with its own work force, it is presumed that the DBE is not performing a commercially useful function.
One can quickly discern from this article that DBE fraud on DOT projects can involve multiple complex issues. If you are aware of DBE fraud, please contact us for a free and confidential consultation. As a whistleblower, your compensation for blowing the whistle on fraud against the government can be significant. You may be entitled to up to 30% of the government recovery, including treble damages. Our whistleblower litigation attorneys can help you understand your rights as a whistleblower and pursue your whistleblower case.
 Safe, Accountable, Flexible, Efficient Transportation Equity Act. 23 U.S.C. § 101; 49 C.F.R. §§ 26.3, 26.21.
 49 C.F.R. § 26.61.
 49 C.F.R. §26.81(a).
 49 C.F.R. § 26.81(b)(2).
 49 C.F.R. § 26.87.
 49 C.F.R. §26.13.
 49 C.F.R. § 26.13(b).
 49 C.F.R. § 26.13(b).
 49 C.F.R. § 26.83(c)(7)(ii).
 49 C.F.R. § 26.83(h)(1).
 49 C.F.R. § 26(j).
 49 C.F.R. § 26.71(a).
 49 C.F.R. § 26.71(d).
 49 C.F.R. § 26.71(e).
 49 C.F.R. § 26.71(j).
 49 C.F.R. § 26.13(b).
 49 C.F.R. § 26.55(c).
 49 C.F.R. § 26.55(c).
 49 C.F.R. § 26.55(c).
 49 C.F.R. § 26.55(c).
 49 C.F.R. § 26.55(c)