Federal investigators looking for fraud in the nation's capital are scrutinizing a program meant to give local contractors a share of major construction projects, people familiar with the probe have told The Associated Press.
Three people in contact with investigators say the FBI and the U.S. Attorney's office are examining partnerships between local companies and outside firms that won multimillion-dollar contracts from the District of Columbia government. The people spoke on condition of anonymity to protect their business relationships.
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Ever since Washington residents won the right to elect their own government 40 years ago, the city has tried to spread tax dollars around in the community by giving bidders preferential treatment when they partner up with local contractors.
And for just as long, critics have complained that the money often goes to political cronies or dishonest businesspeople who game the system.
There has been some recent enforcement by the city, resulting in a $1 million civil fine against one contractor. But the federal investigation, which began more than a year ago, raises the prospect of prison if people are convicted of bilking taxpayers out of millions of dollars and denying opportunities to others that play by the rules.
The city used to set aside a portion of each major contract for minority-owned businesses before race-based set-asides were declared unconstitutional in 1992. Now, the program is open to nearly all companies based in the District, but the idea remains the same: to bolster the local economy by giving disadvantaged residents a chance to participate in and benefit from government projects.
The program is big business: Local partners have been promised more than $2.3 billion through 192 ongoing public-private development projects, according to the D.C. Auditor's office. The most recent audit says the vast majority of these ventures failed to provide required records showing the smaller partner did any work, or received any money.
The partnerships under investigation include an allegedly fraudulent venture that won more than $100 million in contracts thanks in part to "preference points," which it got by including a local company that took a kickback and did little to no work, the people familiar with the probe said.
The District's attorney general alleged that Rockville, Maryland-based Forrester Construction Co. and District-based EEC of DC, Inc., entered into "three sham joint venture agreements" to win the contracts, which included $49 million to rebuild a city school and $48 million to build an agency headquarters. The companies told the District that EEC would do more than half the work as required by law, but agreed on the side that EEC would collect just 5 percent of the profits for doing virtually nothing, the city's lawsuit said.
Forrester agreed to a $1 million fine, and both companies are temporarily banned from city business. But the civil settlements don't preclude the U.S. Attorney from filing criminal charges. Lawyers for Forrester and EEC did not return messages seeking comment.
City employees have directed the attention of federal investigators to other joint ventures they suspect of similar schemes, the people familiar with the probe said. The FBI and federal prosecutors declined to comment on the investigation.
Several won contracts from the Department of General Services, the agency responsible for school construction. Investigators also are examining whether federal stimulus money was given to fraudulent joint ventures, two of the people familiar with the probe said.
The nation's capital has grown from a sleepy federal enclave to a busy metropolis in the decades since Congress granted District residents the right to elect their own mayor and council in 1973. But many residents of less-affluent, predominantly black neighborhoods have missed out on the prosperity.
Maryland businesswoman Shirley Blair, a former chairman of the National Association of Minority Contractors, praises such contracting programs as long-accepted and well-intentioned efforts to bridge that divide. But she said rampant abuse of the District's program has had the opposite effect: legitimate contenders don't even try for city business because they figure they don't have a chance against dishonest competitors.
"It hurts more than it helps, because if you are a minority contractor and a large company wants to use your points, they really do it so that you're just going to take a kickback," Blair said. "You're not going to do any work.'"
U.S. Attorney Ronald Machen has made prosecuting local government corruption a top priority, investigating financial misdeeds by D.C. council members, corruption in the 2010 campaign of Mayor Vincent Gray and possible corruption in the awarding of a $38 million contract to run the District's lottery. Since 2011, three council members, five people affiliated with the mayor's campaign and two former council candidates have pleaded guilty to felonies.
Former Councilmember Michael A. Brown was sentenced this year to more than 3 years in prison after admitting to taking $55,000 in bribes from undercover agents. The FBI agents posed as businessmen wanting his help to get their company designated as a "Certified Business Enterprise," eligible to join larger contractors seeking an edge in bidding for city projects.
The District's Department of Small and Local Business Development designates eligible companies as CBEs and certifies the joint ventures, which must promise that the local company will perform at least 51 percent of the work on any contract worth more than $250,000.
Federal investigators first contacted DSLBD employees in April 2013 with questions about suspicious joint ventures. In early 2014, the office was served with grand jury subpoenas seeking details about partnership approvals, said the people familiar with their probe.
There is no indication any officials at DSLBD have been targeted for criminal prosecution.
The department's director, Robert Summers, declined to comment on the investigation, nor did he respond to multiple questions about the CBE program. He said in an emailed statement that the department is now in "a better position to ensure genuine CBEs have access to the important opportunities the CBE program provides."
Associated Press writer Alan Suderman in Richmond, Va., contributed to this report.
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