Many government agencies at the federal, state and city level have supplier diversity programs in place to ensure that minority- and women-owned business enterprises (M/WBEs) have an equal opportunity to participate in major contracts. Unfortunately, fraud and corruption within these programs have become commonplace, an it’s extremely detrimental to everyone involved. How do you stop abuse to a system that does so much good without punishing those who obey the rules and play the game of business fairly? Lying about minority- or woman-owned status deprives legitimate firms opportunities and greatly restricts competition by discouraging legitimate M/WBEs from participating in corrupt programs. At the other end of the spectrum, adding unnecessary steps and insulting verification procedures also discourages M/WBEs from participating.
Recent examples of fraud can be found in Chicago, Philadelphia and New York, and each of the cities have responded with force to send a message to other would-be charlatans. Cities are increasingly relying on policy enforcement, bans and fines to combat the problem. The office of the Chicago Inspector General Chicago has conducted many investigations of the city’s M/WBE participation program in recent years, resulting in the debarment of 65 firms or individuals and the decertification of over 20 firms or individuals. Perhaps the most notorious case involves James Duff, a friend of longtime Mayor Richard Daley with mob connections, who was sentenced to ten years in federal prison and ordered to repay $22 million of $122 million in city contracts his companies wrongly received.
Just a few weeks ago, current Chicago Mayor Rahm Emanuel permanently banned Windy City Electric Company from doing business with the city after the company falsely claimed to be women-owned in order to secure multimillion dollar contracts with the city. As an added blow, one of the men involved in the scam was a precinct captain for a local alderman. Mayor Emmanuel has stated that he has a zero tolerance policy for fraud, and this action demonstrates that policy well.
Philadelphia will receive a $1.85 million settlement following the revelation that a contractor used a WBE as a pass-through service for a major healthcare program. New York city has had several companies exposed as frauds.
Obviously, this type of corruption often comes at the hands of non-M/WBE firms, but it takes just a few bad apples to spoil the bunch, or a few dishonest businesses to tarnish the reputation of these programs. For every one instance of fraud, there are hundreds of honest, hard-working diverse businesses that provide great service on contracts. Cracking down on fraud is helpful, but it’s not proactive and doesn’t help the right businesses get the contracts they need to grow. Chicago has started tracking payments to some M/WBE subcontractors to prevent fraud and guarantee use of these businesses, but more time and money is needed to enforce compliance.
Even members of Congress are looking to prevent M/WBE fraud on a national level and secure opportunities for legitimate business. Last year, US Senator Robert Casey introduced a bill with several prevention tactics and increased funding to assist MBEs. The bill is focused mainly on ensuring that M/WBEs listed as subcontractors on bids are informed of their inclusion on said bids, which can be a major problem, but certainly not the only one.
While there isn’t any one action or measure that can be taken to correct the system, it’s clear that reform is needed in many state and local agencies. What do you think is the solution to thwarting fraud? More laws and regulations? Increased certification verification? Strict enforcement? Leave your thoughts in the comments below.