Monday, January 28, 2013

Prosecutors target builders on minority-hiring mandates

 Struggling to meet quotas, contractors find themselves accused of fraud.


About 100 CEOs from New York's construction industry gathered at a Times Square hotel last fall for a conference on hiring subcontractors owned by minorities or women. But the event was not about networking: Speakers included Manhattan District Attorney Cyrus Vance, U.S. Attorney Loretta Lynch and city Department of Investigation Commissioner Rose Gill Hearn.

"The message was basically 'We're coming after you,' " recalled one attendee.

That wasn't news to many attendees. Prosecutors have brought a slew of high-profile cases against major city contractors in recent years alleging fraudulent hiring of women and minority-owned subcontractors to meet mandates on city, state and federal projects.

Many of those cases have come out of Ms. Lynch's office, but Mr. Vance got into the act in mid-January, securing a $10 million settlement from Siemens Electrical (the successor to Schlesinger-Siemens Electrical), which was controlled by German conglomerate Siemens AG. In a deferred prosecution agreement, Siemens Electrical admitted to filing false documents stating it had hired a minority contracting firm to help build the $3.2 billion Croton water-treatment plant in the Bronx. In fact, Schlesinger-Siemens Electrical provided much of the labor and equipment.

The government is not asserting that minority-owned firms are not being paid, but that they are being denied the chance to mature and gain expertise by doing their own work.

"Up until these types of investigations, there was no clear definition of what assistance a primary contractor could or could not provide [to subcontractors]," said Louis Coletti, president of the Building Trades Employers' Association.

General contractors say there is a counternarrative to accusations that their industry is boxing out women and minority contractors, even as they land lucrative public projects requiring minority hiring. One overlooked fact, they note, is that in the government prosecutions, the minority contractor alleged to be a front group was on a city, state or federal government-approved list of minority or women contractors.

Qualifications questioned

Because the lists lack certain details, however, it can be difficult to tell whether these contractors are capable of the work they say they can do. If they struggle, a general contractor can be tempted to provide capital, equipment or technical assistance to a subcontractor that is supposed to be able to stand on its own.

"The bible is the certification list," said Mr. Coletti. "We believe that it is government's responsibility to ensure that those on the list can provide commercially useful functions and [that it] doesn't contain subcontractors that say they can do a $2 million job, but can only do a $500,000 job."

Some primary contractors also question whether the mandates in government contracts are realistic, especially in highly specialized fields that might lack qualified minority contractors. And they suspect that prosecutors zealously pursue the cases because of the potential for millions of dollars in deferred prosecution agreements.

Prosecutors' use of the term "fraud," when there may not have been malicious intent, also rubs many in the industry the wrong way.

"I think what has happened is that there is an expectation on the part of prosecutors that primary contractors enter into these relationships with [subcontractors] with full knowledge of all of their circumstances," said Denise Richardson, managing director of the General Contractors Association of New York. "I think that in many instances that is very unfair." In other words, contractors think their minority subcontractors have more expertise or resources than proves to be the case.

Amid the controversy, city and state governments have been raising goals for minority firms. Gov. Andrew Cuomo is pushing for 20% of state contracts to go to firms owned by women and minorities, while the City Council passed reforms in December to increase their share of city contracts fivefold, to $2.2 billion from $433 million.

Clubby industry

The primary contracting industry did win a few concessions in the city law, which requires the Department of Small Business Services to ensure that the minority firms physically exist, and demands subcontractors submit more financial information. But questions remain about whether the agency has the resources to vet all of them properly.

Some proponents of the quotas, meanwhile, say the underlying problem is the ingrained clubby nature of the construction industry. Only a change in attitude will solve the problem, they say.

"People like to work with individual firms and crews that they're familiar [with]," said Regina Smith, executive director of the Harlem Business Alliance. "They've been setting up these front groups when there are minority contractors available. When there's a will, there's a way. But there just hasn't been a will."

Large contractors reject that assertion, but acknowledge that the bevy of prosecutions are having an effect.

Said Mr. Coletti, "The prime contractor community is becoming very careful when it comes to following the law."

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