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Ethically Pursuing Opportunities

May 1, 2017





Situation

In 1983 President Reagan signed into law the first federally mandated disadvantaged business enterprise (DBE) program. Its goal was to give small minority-owned businesses more opportunities to participate in state and local transportation projects funded by the U.S. Department of Transportation. Shortly after its adoption, additional legislation was passed to include in the program businesses owned by women.

State and local governments that receive federal funding for transportation design and construction projects are required to establish and manage goals for DBE involvement on these projects. These goals include both annual statewide participation objectives as well as goals for particular contracts. In the latter, the prime contractor, if not a DBE itself, is required to demonstrate that a threshold percentage of work will be subcontracted to one or more DBEs.

For a business to qualify as a DBE, it must establish that at least 51 percent of its ownership belongs to a member of a "disadvantaged" group, which is defined to include women, members of certain ethnic minorities, and, in some cases, disabled persons. Because the program is designed to support small businesses, the business must not have annual gross receipts in excess of a set maximum, and the disadvantaged owner himself or herself must not have a personal net worth of more than $1.32 million. Perhaps most important, the DBE must not be under the control of a non-DBE parent or affiliate, and it must be capable of performing a "commercially useful function" on a contracted project, not merely serving as a figurehead or pass-through entity for the sake of meeting participation goals.

Although the goal of the DBE program is to support small businesses owned by women or members of minority groups and help them develop and flourish so that such special treatment is no longer needed, the competitive advantage that the program affords to qualified DBE firms has an unfortunate ethical consequence in that it has enticed individuals to seek an unfair economic advantage through deceit. The scenario presented here is an amalgamation of several cases in which a design firm or a construction contractor was found to have committed fraud in connection with the DBE program. 

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A multistate engineering and construction management firm is looking to secure additional contract work on federally funded transportation projects. Recognizing the opportunities opened by the DBE program, the firm's owner approaches one of his longtime employees with a plan. The owner offers to fund the employee in establishing a company under the employee's name. The employee, an individual of Filipino descent, would then register his company as a DBE and would bid as a subcontractor on state projects. If the new DBE was successful on a bid, the multistate firm would perform the work and receive all the profits from the contract, except for a fixed fee that would be returned to the DBE as a reward for its efforts.

The employee agrees to the plan, and for a time the new scheme is wildly successful. The multistate firm finds subcontracts that it wishes to fulfill, and the DBE submits bid paperwork in its own name. When the DBE receives a subcontract, employees of the multistate firm who are assigned to work on the project are given email addresses, stationery, and business cards bearing the name of the DBE. These employees are paid from the DBE's payroll account, but the multistate firm later reimburses the DBE for the labor costs. The DBE uses office space in a building owned by the multistate firm, and the two firms share accounting, human resources, and administrative staff.

Over a period of several years, millions of dollars in contract awards are funneled to the multistate firm through the DBE. The scheme is ultimately discovered, however, when a former employee of the multistate firm files suit under the False Claims Act. (This federal statute allows private whistle-blowers to initiate lawsuits qui tam [for the government as well as themselves] against entities alleged to have defrauded a federal agency and then to receive a percentage of any funds recovered by the agency.) The suit is successful, and the two companies are ordered to pay more than $2 million in restitution to the state departments of transportation; the whistle-blower receives an award of several hundred thousand dollars. Moreover, numerous other sanctions, including debarment from bidding on future federal contracts for a certain period, and criminal penalties are imposed on both the owner of the multistate firm and the owner of the DBE. 


Question

If the individuals in this case had been ASCE members, would their actions have violated ASCE's Code of Ethics?

Discussion

The most forthright injunction against fraudulent activity is found in canon 6 of the ASCE code: "Engineers shall act in such a manner as to uphold and enhance the honor, integrity, and dignity of the engineering profession and shall act with zero tolerance for bribery, fraud, and corruption." In fact, given  the degree and magnitude of the deceit practiced by the individuals in this case, their conduct would have violated not only canon 6 itself but nearly all the guidelines to practice for this canon. Category (a), for example, stresses that engineers must not "knowingly engage in business or professional practices of a fraudulent, dishonest, or unethical nature"; category (b) is emphatic that engineers "be scrupulously honest in their control and spending of monies"; and category (e) enjoins engineers to "strive for transparency in the procurement and execution of projects."

Yet an analysis of the ethical lapses in this case study does not end with canon 6. An additional examination should begin by looking to the parties most harmed by this scheme. First among these were the federal and state departments of transportation. Although these agencies received the value of the services rendered by the contractors, they were thwarted in their attempts to expand opportunities for deserving DBEs. By placing their own personal benefit over the objectives of their clients, the two owners in this scheme rode roughshod over canon 4 as well: "Engineers shall act in professional matters for each employer or client as faithful agents or trustees."

The second group harmed comprised DBEs honestly competing for work on federally funded projects. In competing through a shell corporation for work that probably would not have been awarded to them directly, the perpetrators of this scheme gained an unfair advantage over other competitors in violation of canon 5: "Engineers shall build their professional reputation on the merit of their services and shall not compete unfairly with others."

While the existence of the DBE program itself is not without controversy, with common complaints ranging from its basis in constitutional law to the challenge of finding DBE subcontractors with appropriate qualifications, it goes without saying that individuals who undertake to perform work under this program must do so in a way that is consistent with their professional and ethical obligations, adheres to the spirit and the letter of the law, and honors their duties to the client, the taxpayer, and the public at large.



Members who have an ethics question or would like to file a complaint with the Committee on Professional Conduct may call ASCE's hotline at (703) 295-6151 or (800) 548-ASCE (2723), extension 6151. The attorneys staffing this line can provide advice on how to handle an ethics issue or file a complaint. Please note that individual facts and circumstances vary from case to case, that some details may have been altered for purposes of illustration or confidentiality, and that the general summary information contained in these case studies is not to be construed as a precedent binding upon the Society.

© ASCE, Civil Engineering , May 2017