Unattainable Equity: A Look into Fraudulent Activity Under the State of New York’s MWBE Program
The State of New York’s Minority and Women-Owned Business Enterprise (MWBE) Certification Program was established in 1988 under Article 15 of the New York State Executive Law. The program was designed with the intent of “ensur[ing] and promot[ing] fair and equal employment and participation”. Since its institution, the program has provided resources and established goals for businesses that are owned by minorities and women around the state of New York. But despite New York’s establishment of guidelines and quotas for minority and women participation, the reality of the program’s effects are far from its original intentions. In fact, fraudulent schemes that fabricate quota satisfaction have become far too prevalent in the world of the MWBE Certification Program, and the action taken against them has been far from effective. Specifically, non-prosecution agreements between Schiavone Construction Company, L.L.C and cases such as U.S. v. Davis (2015) highlight the vulnerabilities in MWBE regulations and the variability of punitive action in response to fraudulent schemes. These two cases also shed light on the various loopholes used by large contractors that allow them to come out of MWBE lawsuits and agreements almost entirely unscathed.
The MWBE Certification Program is considered a pioneer in the world of advancing minority and women businesses’ participation in State contracting and subcontracting. At its very core, the program acknowledges years of historical marginalization of minority and female groups within state-awarded contracts and subcontracts, and attempts to bridge the gap between disadvantaged groups and their Caucasian male counterparts. While the State of New York has established a thirty-percent utilization quota for MWBEs, meaning that thirty-percent of state contracts must be awarded to these enterprises, prime contractors have found ways to evade these standards. Specifically, utilization rates have been artificially boosted through fabricated reports, meaning that disadvantaged companies that are hired as subcontractors are used to ultimately benefit corrupt prime contracted companies.
In 2002, Schiavone Construction Company L.L.C., a construction engineering company, was awarded three prime city contracts: the $2.8 billion repair of the Croton Water Treatment Plant and the $90 million and $261 million renovations of the Times Square and South Ferry subway stations. The contracts required Schiavone to comply with the State of New York’s MWBE program, which entailed hiring a specific percentage of certified MWBEs, thereby ensuring that they performed their subcontracting duties, and submitted regular “Utilization Reports” regarding payments made to subcontractors. Between 2002 and 2007, Schiavone Construction hired multiple minority and women-owned businesses as subcontractors under its projects. While it was well established that these subcontractors would assist Schiavone in its public work efforts, Schiavone later admitted that it had submitted false Utilization Reports and had simply hired MWBE subcontractors as “pass throughs”, meaning that the hired MWBE companies were shown on paper as performing work that was actually being done by non-MWBE companies.
After admitting its fraudulent scheme, Schiavone agreed to several remedial measures in a non-prosecution agreement with the state government. These measures included establishing an Ethics and Compliance Officer at Schiavone, removing management that was affiliated with the fraudulent scheme, and creating codes of conduct that complied with the MWBE program. In addition to these settlement agreements, Schiavone agreed to pay $20 million to the United States Treasury and $2 million in furthering construction fraud detection and deterrence.
While the settlement reached between Schiavone and the New York government is a step in the right direction, it highlights a troubling aspect of MWBE regulations. Indeed, settle agreements can be hefty. However, they are not always effective deterrents for large companies like Schiavone, especially because they allow entities to get away with fraudulent schemes through non-prosecution agreements and avoid criminal charges. Moreover, MWBE regulations are not standardized, making the case-by-case process to hold unethical companies accountable an inconsistent procedure.
The variability in punishment in the defrauding MWBE programs is further illustrated by United States v. Davis (2015). Similar to the Schiavone Construction case, in 2016, a Manhattan jury convicted Larry Davis, CEO of the construction company DCM Erectors, of unlawfully using MWBEs as “pass throughs” when his company was hired to do construction work at the World Trade Center. Rather than being prosecuted and undergoing punitive action, Davis was acquitted by U.S. District Judge Loretta Preska on the grounds that his agency’s desires to employ MWBEs was merely “aspirational” and not a requirement of the company’s contract. It is not to say that Preska’s interpretation of the contract’s requirements as dispensable was far off. The Port Authority program, which had hired Davis’ agency, emphasized the contract’s 17% MWBE quota as a “good faith effort”, not a strict requirement.
While the Davis ruling was legally sound, it once again emphasizes the variability present in MWBE contracting and punishment. It is evident that DCM Erectors pursued a fraudulent scheme and attempted to cover up its unethical actions, rather than simply avoiding the MWBE quota entirely. The Davis ruling also emphasizes the non-binding phrasing that is often associated with MWBE “requirements”, making it fairly easy to avoid compliance with its regulations. Through the United States v. Davis (2015) ruling, the need for stricter regulations is once again emphasized. Specifically, the MWBE program must include compulsory clauses within its state-composed contracts in order to ensure compliance or proper prosecution upon failure to meet the contract’s requirements.
Prosecutors, investigators, and industry observers agree that fraudulent schemes under the Minority and Women-Owned Business Program are everywhere. While the contracted work gets done, corrupt strategies undermine the efforts of the MWBE Certification Program and widen the gap between historically advantaged and disadvantaged groups. In order to strengthen the program and ensure that the State of New York’s goals are being met, it is vital that the state enforce measures that not only make it difficult for construction companies to find loopholes, but also hold them accountable for their wrongdoings. It would mean allowing the State to criminally prosecute in this case.
Historical disenfranchisement and marginalization have no doubt manifested themselves in contemporary social structures. Programs such as the Minority and Women-Owned Enterprise Certification Program acknowledge these disadvantages and work to mitigate such discrepancies. Thus, it is crucial that this program be corrected and protected through proper amendments in order to fulfill its intentions of equity in the world of state contracting and subcontracting.
 “Article 15-A of the Executive Law.” Welcome to Empire State Development, 4 Nov. 2016, esd.ny.gov/mwbe/programmandate.html.
 “MWBE Goals & Reporting Responsibilities.” MWBE Goals & Reporting Responsibilities - NYS Dept. of Environmental Conservation, www.dec.ny.gov/about/48854.html.
 “As MWBE Support Rises, Calls Grow for Tougher Action on Fraud.” CSNY, 11 Feb. 2016, www.cityandstateny.com/articles/politics/new-york-city/as-mwbe-support-rises,-calls-grow-for-tougher-action-on-fraud.html.
 Rashbaum, William K. “Schiavone Admits Fraud in Minority Contractor Jobs.” The New York Times, The New York Times, 29 Nov. 2010, www.nytimes.com/2010/11/30/nyregion/30fraud.html.
 “CEO Of Steel Contractor On World Trade Center Site Convicted At Trial Of Fraud In Connection With Program Designed To Encourage Participation Of Minority And Women-Owned Businesses.” The United States Department of Justice, 10 Aug. 2016, www.justice.gov/usao-sdny/pr/ceo-steel-contractor-world-trade-center-site-convicted-trial-fraud-connection-program.
 United States v. Davis, 13-cr-923 (LAP) (S.D.N.Y. Aug. 3, 2017).