Insights & Reports > Kroll Global Fraud Report

The U.S. federal stimulus plan will spend billions of dollars over the next two years on infrastructure – building roads, bridges, schools, and other projects – to provide a boost to construction and manufacturing firms and to jolt the slumping economy. It will also offer a new challenge to fraudsters as they scheme to divert some of those billions to themselves. Government set-aside programs are among the likely targets.

On many public works projects in the United States, federal, state, and local governments give special consideration to minority- and woman-owned businesses, part of a long-standing effort to bring them into the economic mainstream. The laws and policies that reserve a portion of contracts for these businesses also provide an opportunity for fraud. If a business appears to be controlled by a minority or women, its chances of winning a contract increase.

Schemes that pass off companies as minority- or woman-owned when someone else actually controls them defraud the taxpayers who are paying for the construction. These ploys also cheat legitimate contractors who are bidding on work in good faith, and undermine the social policies behind the government programs at the expense of those they are intended to benefit. Uncovering such misrepresentation requires an understanding of the business’ ownership, history, and who its real decision-makers are.

This requires looking beyond corporate filings. In Chicago, Windy City Maintenance, Inc. was for years believed to be a woman-owned provider of janitorial services to the city, and Remedial Environmental Manpower Inc. to be a minority-owned recycling firm. A federal investigation, after closely looking at their ownership structure, revealed that behind the scenes James Duff, a white man, controlled both. His mother “owned” the janitorial firm, while an African-American friend “owned” the recycling business. Putting ostensible ownership in others’ names gave Duff an advantage in winning city contracts valued at more than US$100 million.

Minority- and woman-owned businesses can be certified in a variety of ways. Most states, as well as many cities and counties, have formal programs to do so. The federal Small Business Administration certifies companies as socially disadvantaged through its 8(A) program. Key is that a member of a minority group or a woman declares that he or she actually owns more than half the business, manages it, and that it is substantially independent of a non-certified business.

In most cases, verification of such declarations is limited. Often, it is not until a certification is questioned following a contract award that a thorough investigation takes place. In 2006, for example, federal prosecutors criminally charged Siemens Medical Solutions USA Inc. after investigators determined that the company had misrepresented its relationship with a minority-owned firm to provide radiology equipment for a new hospital in Chicago. The fraud unraveled only after a rival bidder sued the county to derail the contract award.

The county-owned hospital had required bidders to set aside at least 30 percent of the work for minority-owned businesses. Siemens Medical allegedly paid the owner of Faustech Industries, Inc. half a million dollars to pose as its minority-owned partner. Prior to a criminal trial, Siemens Medical pleaded guilty to obstructing justice. A federal judge ordered the company to reimburse local government US$1.5 million and pay a US$1 million fine. Also among those indicted was a Siemens Medical in-house lawyer, who pleaded guilty to making false statements to federal investigators.

The true nature of the relationship between Siemens Medical and Faustech Industries did not become clear until someone asked questions and looked more closely at the businesses. As the competition for stimulus plan money heats up, many companies will want to take a closer look to ensure that their competition is not using a false claim of minority- or woman-ownership to gain an unfair advantage.

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Mark Skertic is a director in Kroll’s Chicago office. A former journalist, he covered the airline industry and financial markets for the Chicago Tribune and was an investigative reporter at the Chicago Sun-Times.

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