If you are planning to defraud the U.S. Government (and I certainly hope that you are not), your best bet is to avoid the U.S. Department of Transportation’s Disadvantaged Business Entity program.

Yesterday, the Department of Justice announced that a DOT DBE subcontractor had agreed to settle “pass-through” fraud claims for $936,000.  The DOJ’s announcement comes on the heels of a June 6 press release touting a settlement of nearly $3 million, also stemming from alleged DOT DBE fraud.

Let’s start with the case of the subcontractor, Kleinberg Electric, Inc.  The Kleinberg case arose out of a New York Metropolitan Transportation Authority design-build construction project, which was federally-funded.  The MTA set the DBE participation goal for the project at 10 percent, or approximately $12.7 million.

The prime contract was awarded to Slattery Skanska, which subsequently issued a subcontract to Kleinberg.  According to the DOJ, Kleinberg informed Skanska that it would contract with J&R Rey, a certified DBE, as a second-tier subcontractor to perform $600,000 of work.  In fact, J&R never performed any work on the contract, and its president later admitted that it “never performed a commercially useful function.”  Instead, Kleinberg paid J&R “commissions” for the pass-through use of J&R’s DBE status.

Under the settlement agreement reached yesterday, Kleinberg took responsibility for its actions and agreed to pay a $936,000 fine.  The Kleinberg case shows that just because a company is not performing at the prime contract level does not mean that it is safe from fraud allegations.  Fraudulent pass-throughs of the type the DOJ alleges Kleinberg committed are improper at the subcontract level, as well.

The June 6 settlement arose from a False Claims Act whistleblower lawsuit filed by a former employee of TesTech, Inc.  In the lawsuit, the whistleblower contended that TesTech falsely claimed that it was owned by Sherif Aziz, a minority, in order to obtain DBE certification.  TesTech then used its DBE certification to obtain numerous highway and airport construction projects.  In fact, TesTech was owned by CESO Testing Technology, Inc., CESO International, LLC, and CESO, Inc., three related companies referred to collectively as “CESO” by the DOJ.

Under the settlement, TesTech, CESO, Aziz, and the owners of CESO collectively agreed to pay $2,883,947 to resolve the False Claims Act allegations.  As for the whistleblower, Ryan Parker, he will not need to worry about finding a new job anytime soon: he will receive $562,370 as his share of the settlement.

The TesTech case provides a good contrast to the Kleinberg settlement.  Although pass-through fraud gets a lot of attention on this blog and elsewhere, it is not the only type of DBE fraud out there.  In TesTech’s case, hidden relationships with other companies and individuals were at the heart of the False Claims Act allegations.

The two settlements announced in the last week indicate that the DOT and DOJ are aggressively pursuing charges against DOT DBE fraudsters.  Kudos to the Government for working to maintain the integrity of the DOT DBE program.  And congratulations to Mr. Parker on his new found wealth.