Construction companies face legal risk at every phase of the construction project. As recently as May 2018, the Inspector General of the Port Authority of New York and New Jersey, Michael Nestor, stated that his office would “continue to work with the Manhattan District Attorney’s Construction Fraud Task Force, and all our law enforcement partners, to identify, investigate and bring to justice those who corrupt the integrity of the construction industry.” 

Over the past several years, federal and state law enforcement authorities have focused on how construction companies procure contracts; secure licenses and permits; utilize third-party vendors; and bill their clients. Regulators have brought significant actions against construction companies for alleged misconduct in these stages of the project life cycle under the Foreign Corruption Practices Act, federal and state false claims acts, and other federal and state anti-fraud statutes, and show no signs of slowing down. Knowing the current law enforcement trends and maintaining a robust and tailored compliance program will serve construction companies well in mitigating the risk of one of these enforcement actions happening to them. 

Law Enforcement Trends

Recently, prosecutors have brought several actions under the FCPA against construction companies. Construction companies heavily utilize third-party vendors and frequently partner with local firms for assistance in obtaining and performing international work. These practices create significant risks for FCPA liability. 

As such, it should come as no surprise that the largest-ever global anti-corruption resolution involved a construction company. In December 2016, Brazilian contractor Odebrecht S.A., and its subsidiary, Braksem S.A., pleaded guilty and agreed to pay a combined penalty of at least $3.5 billion in connection with allegations that they paid hundreds of millions of dollars to government officials around the world through a complex network of shell companies, off-book transactions and offshore bank accounts to secure work. This action also highlights the recent trend of global enforcement in anti-corruption cases, as it was the result of a joint effort between the U.S., Brazilian and Swiss governments. 

There has also been a recent uptick of enforcement actions against construction companies for false Disadvantaged Business Enterprise certifications. Many of these actions are brought under the federal False Claims Act, which, with its penalties of up to $22,000 per false claim and three times the government’s loss, can result in significant liability for construction companies. In November 2015, Granite Construction, Inc. entered into a non-prosecution agreement and agreed to pay more than $8 million to the federal government and the New York Metropolitan Transportation Authority (MTA) Office of the Inspector General to resolve a criminal investigation into an alleged DBE fraud scheme. Granite’s wholly-owned subsidiary served as the prime contractor on an MTA project and was obligated to make good faith efforts to subcontract a specified percentage of work to certain DBEs. The government alleged that, instead, the company used a DBE as a “front company” while non-DBEs performed the work. 

Federal and local prosecutors recently also utilized federal and state mail and wire fraud and other anti-fraud statutes to bring actions against construction companies for overbilling their private sector clients. In October 2016, Plaza Construction paid more than $9 million in penalties, restitution and forfeiture and entered into a deferred prosecution agreement with federal prosecutors in Brooklyn, New York for billing their clients more than $2.2 million in hours not worked and systemically inserting hidden surcharges into their bills. 

Finally, federal and state law enforcement authorities have recently focused on prosecuting construction companies for wage and hour violations. In May 2018, Ranco Construction entered into a $1.5 million settlement with federal prosecutors in New Jersey to resolve a joint federal and state false claims investigation alleging that Ranco underpaid workers and doctored payroll records to reflect that it was abiding by federal and state wage

Strategies to Mitigate Risk of Enforcement Actions

As Benjamin Franklin said, “An ounce of prevention is worth a pound of cure.” Similarly, a construction company’s first line of defense against law enforcement action is maintaining an effective compliance program. Not only will an effective compliance program assist the company in promptly identifying potential misconduct and deterring future misconduct, but federal and state law enforcement authorities will look to a company’s compliance program to determine whether to bring an action and what types of sanctions to seek. An effective compliance program, at a minimum, contains the following elements.

Senior Management Leadership

Law enforcement authorities will assess whether the company has a culture set from the top that encourages ethical conduct and a commitment to compliance with the law. The company’s board of directors or other highest-level governing authority should be knowledgeable about and exercise reasonable oversight over the compliance program. A specific senior executive should be assigned overall responsibility for the program. The company should designate a specific individual to handle the day-to-day management of the program. The company should give this designated compliance person adequate resources, appropriate authority and direct access to the company’s highest-level governing authority. 

Meaningful Policies and Procedures

The company’s compliance program should include written, robust and meaningful compliance policies and procedures that are tailored to the company’s particular business practices and risks. Regulators will consider “off-the-shelf” compliance programs that do not address a firm’s unique risk factors and potential conflicts of interest as insufficient. In addition, companies should regularly educate and train all employees on their compliance programs.

Periodic Risk Assessments and Compliance Monitoring

Companies should conduct periodic enterprise-wide risk assessments to determine the particular legal and compliance risks facing the company. Importantly, regulators deem proactive assessment of risk as fundamental to developing a strong compliance program. Companies should also implement robust monitoring and testing procedures to ensure that their compliance programs remain tailored to the particular risks and potential conflicts of interest facing them and the construction industry. The company’s general ledger, accounts payable and cash disbursement records and expense reports can be collected and assessed for risk of procuring contracts, permits and licenses through improper methods. Client certifications, progress payment applications and employee time reports and pay records can be gathered and analyzed for adherence to client contracts, proper client billing and compliance with wage and hour laws. 

Moreover, as construction companies can face significant liability for FCPA, FCA or wage and hour violations by their third-party vendors, they should engage in thorough third-party vetting. The company’s review should ensure that the third-party vendor is financially stable, qualified to do the work and not likely to engage in any improper practices that could expose the company to liability. Contracts with third parties should include anti-corruption representations and warranties and rights to inspect books and audit payments. Third-party diligence should also include real-time jobsite monitoring and invoice review to confirm that the third-party vendor actually is performing the work. 

Confidential Reporting and Internal Investigations

Compliance programs should have protocols that encourage employees and third parties to report potential misconduct, including anonymously, and a process for prompt and comprehensive internal investigations. The company should consider the nature of the alleged conduct and individuals involved when structuring internal investigations. Where the alleged misconduct involves senior officials, serious employee misconduct or systemic corporate wrongdoing, or when the company appears to be a focus of a government inquiry, the company should consider having the internal investigation directed by legal counsel so that it might be protected under the attorney-client privilege and work product doctrine. The company should also consider whether the internal investigation will cover any overseas conduct and, if so, account for any differences in local privilege or data privacy laws. 

Remedial Steps

If the company uncovers misconduct, it should in a timely and appropriate manner discipline the personnel who engaged in the misconduct and return any funds misappropriated from clients. The company should also reassess its compliance policies and procedures in light of the misconduct, make any necessary adjustments and educate and train its employees on any modifications. 

In addition, the company will need to decide whether to voluntarily self-disclose any potential misconduct to the government. This decision is vital because of the expectations of regulators that companies self-disclose fully and in a timely manner and the benefits that regulators may afford to companies who do so. Companies should consider the severity and duration of the misconduct; the potential benefits to be gained from self-disclosure; and any ancillary impacts of self-disclosure, such as potential privilege waiver in any subsequent litigation. Any voluntary self-disclosure to the government should be factual, not include privileged information and be made under a “non-waiver” agreement that specifies that the company does not intend to waive privilege and requires the government to keep any disclosed information confidential. 

There is no way to completely eliminate the risk of law enforcement action on construction projects. However, by recognizing law enforcement trends, analyzing the company’s and industry’s risk factors and developing and maintaining a robust compliance program that is tailored to these risks, construction companies can position themselves to significantly mitigate the risk of government actions and successfully navigate them should they arise.