White-Collar Crime Underscores Importance of Customer Verification

A federal judge in Missouri sentenced a former construction operations manager to eight years in prison for his role in a fraud scheme that won the company $335 million in government contracts for which it was not eligible.

WHY IT MATTERS: According to the FBI, white-collar crimes can destroy a company, cost investors billions of dollars and erode the public's trust in institutions.

This white-collar crime seems to have opened pandora's box in construction. "It's based upon the infrastructure bill, where money is being put into these federal and state projects that require a certain amount of minority participation," explained Chris Ring of NACM's Secured Transaction Services. The Infrastructure and Jobs act funds $1.2 trillion for construction of federal highways, transit, highway safety, motor carrier, research, hazardous materials and rail programs.

"This case really is just a reminder to people, if they're selling to what is considered a disadvantaged business enterprise (DBE), that they verify that they are providing a Commercially Useful Function (CUF)," Ring added. "Not only that, the person who was supplying materials to that subcontractor is just as guilty."

CASE DETAILS: "Prosecutors say Dingle, along with Matthew McPherson, then president of Topeka, KS-based McPherson Contractors, used a 'rent-a-vet' and 'rent-a-minority' scheme to win the North Kansas City, MO-based Zieson nearly 200 federal government contracts between 2009 and 2018," per Engineering News-Record (ENR). These programs were designed to help small businesses owned and controlled by service-disabled veterans and minorities.

Western Missouri U.S. District Court Judge Roseann Ketchmark ordered that Dingle forfeit $5.4 million representing his share of the profit and restitution. "His jail term includes five years in the fraud case, to be served consecutively with a three-year term in the tax case," per ENR. Dingle is to begin serving his sentence on Nov. 7, most likely at FCI Schuylkill in Minersville, PA.

In his fraud scheme, Dingle took advantage of the disadvantaged business enterprises (DBE) program. "Conceived in the 1980s, the DBE program was originally a 10% set-aside (quota) for participation by minority- and woman-owned businesses in federally funded, transportation-related construction projects," per Construction Business Owner. The program was created to rectify past discrimination against women and minorities in the construction industry.

TAKEAWAY: In order to qualify as a DBE, a firm must be considered small, based on either its number of employees or total sales. Size standards are set and published by the Small Business Administration (SBA) based on the North American Industry Classification System (NAICS) code for the firm's primary area of business.

The DOT's DBE Program permits states to set up DBE programs, in compliance with DOT standards, that promote contracting opportunities for DBE firms through infrastructure projects initiated by state and local governments and funded at least in part by DOT.

Above and beyond being an approved DBE, in the construction world, the DBE must also prove that they are providing a CUF. Without that verification, the DBE can be considered a "pass through" that limits the material supplier's ability to claim against a payment bond. Additionally, without CUF verification, most states have the ability to prosecute under the "false claims" statutes that the DBE is "falsely" claiming that they are providing a function meant to improve the value of real property.

A DBE performs a CUF when it is responsible for execution of the contract and is carrying out its responsibilities by actually performing, managing and supervising the work involved. The DBE also must be responsible, with respect to materials and supplies used on the contract, for negotiating price, determining quality, quantity, ordering the material and installing (where applicable) and paying for materials.

-Jamilex Gotay, editorial associate

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Saturday, 13 April 2024

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