The Taxonomy of Minority Contractor Scams

A year ago, City Limits investigated the flaws and shortfalls of New York City’s program to increase the share of city contracting done by firms headed by minorities and women. More recently, contributor Adam Wisnieski raised some sticky questions about New York State’s MWBE goals.

But when it comes to measuring a government’s performance against its contracting goals, a new grand jury report released by Manhattan District Attorney Cyrus Vance makes clear that at least some of the “success” of MWBE programs has been fraudulent.

The report (read it here) says the investigation “revealed criminal conduct by several individuals and corporations in the construction industry, spanning at least a decade” which “threatens the very goals of the MWBE programs.” It spells out several recommendations to reduce the degree of fraud.

The scam is actually one of three kinds of scams, the report found:

In many instances, the MWBE was engaged as a subcontractor to provide services (such as electrical or plumbing work) needed by the prime contractor or other subcontractors. The MWBE did not perform the work, however. Instead, it functioned as a “pass-through.” The MWBE’s role was limited in such cases to billing for work done by non-certified businesses, receiving the payments, and funneling payments to the entity that performed the work that was supposed to have been done by the MWBE. The MWBE, in effect, rented its name and provided billing services to the non-MWBE entity. …

Another form of MWBE fraudulent scheme is similar to the first, except that it involved the MWBE as a purported supplier of materials. Rather than supply the materials, however, the MWBE simply acted as a conduit. Typically, the prime contractor would contract for materials with a large, established, non-MWBE supplier, but the paperwork documenting the shipment and delivery of the materials would falsely reflect that an MWBE had provided the materials. …

The final step in both pass-through schemes was the prime contractor’s filing of documents with the contracting agency falsely representing that the MWBE had performed services or provided materials. The amount of money that the prime contractor claimed for the services or materials purportedly provided by the MWBE was the sum of the amount owed to the non-MWBE that performed the job plus the “fee” for the pass-through MWBE. The fees typically range from 2 percent to 4 percent of the value of the work performed or materials supplied. …

The third fraudulent scheme requires the certified MWBE to obtain a contract as a prime contractor, but then operate only as a “front” company for a non-MWBE business. A common scenario entails a male-owned construction company arranging for a woman, who is a friend or relative or a principal of the non-MWBE, to obtain WBE certification for an entity that the woman purportedly owns or operates. The non-MWBE performs the contract, but the paperwork and requests for payments are generated by the “front,” making it appears that a WBE performed the work.