BILL ANALYSIS
SENATE COMMITTEE ON VETERANS AFFAIRS
JEFF DENHAM, CHAIRMAN
Bill No: AB 177
Author: Ruskin
Version: As proposed
Hearing Date: June 22, 2010
Fiscal: Yes
Consultant: Donald E. Wilson
SUBJECT OF BILL
Fraud penalties for violating Small Business and Disabled
Veteran Business Enterprise (DVBE) provisions.
PROPOSED LAW
1. Requires a business found to have committed fraud
in establishing a Small Business or Disabled Veterans'
Business Enterprise (DVBE) programs (hereafter
referred to as said programs) to reimburse an awarding
department and the Department of General Services
(DGS) for the cost of an investigation that led to the
fraud finding.
2. Requires the fine generated from the fraud penalty
to reimburse the fund from which the contract was
awarded, except when a penalty paid is paid to DGS. In
which case, that money will be deposited into the
Service Revolving Fund.
3. Increases the first-time penalty for fraudulently
participating in said programs from a minimum of six
months and maximum of 36 months, to a minimum of 36
months and a maximum of 10 years.
4. Increases the first-time suspension penalty for
fraudulently filing said businesses with DGS from one
year to five years.
5. Increases subsequent suspension penalties for
fraudulently filing said businesses with DGS from a
maximum of three years to a maximum of 10 years.
6. Adds a revocation of a businesses seller's permit
for subsequent penalties for fraudulently filing said
businesses with DGS.
7. Applies revocation penalty for subsequent penalties
for fraudulently filing said businesses with DGS to
the principles of the business and not simply the
business's name.
8. Prohibits violators from any further contracting
with the state until "all the penalties are
satisfied."
9. Makes it unlawful to "willfully and knowingly" make
false statements, declarations, or other documents
with false material matter, even if the person
authorized to file such papers has no knowledge or has
not consented to the fraud.
10. Makes it unlawful to "willfully and
knowingly" aid or assist with fraudulent advice in
filing documents, even if the person authorized to
file such papers has no knowledge or has not consented
to the fraud.
11. Makes it unlawful to establish or
knowingly aid in the establishment of any firm known
to be in violation of these sections.
12. Increases civil penalties for civil
violations from a maximum of $5,000 to a minimum of
$10,000, and a maximum of $30,000 for a first
violation.
13. Implements civil penalties for each
subsequent violation of a minimum of $30,000 and a
maximum of $50,000.
14. Allows DGS to recover attorney fees and
other costs associated with such actions.
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15. Allows DGS to pursue administrative
action and penalties even if the attorney general does
not bring a civil case.
16. Defines "awarding department" and
"contractor" for the purposes of this subdivision.
17. Amends Military and Veterans Code (MVC)
section 999.9 to make it a crime to "knowingly and
with intent to defraud" claim a "commercially useful
function" (CUF) with a DVBE in order gain a bid
preference.
18. Amends MVC section 999.9 to allow an
awarding department to terminate a contract if the
DVBE is in violation of the CUF fraud added to the
code by this bill. Also directs the controller to
withhold any payments to that contractor.
EXISTING LAW AND BACKGROUND
1. Since 1989, California has encouraged a 3% set
aside on state contracts.
2. In the early 2000s, rampant fraud was exposed in
the program and the state legislature has attempted to
close fraud loopholes ever since.
3. Among other forms of fraud were "pass through"
companies that did not manufacture or compete in the
market place, but rather only added their mark up to
the state's price for commodities.
AB 669 of 2003 (Cohn) codified the requirement for a
DVBE to perform a "commercially useful function"
(CUF).
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4. Another form of fraud that had been detected was
the use of Limited Liability Corporations (LLC) to
hide the fact that disabled veterans were no longer
owners of companies, in spite of the fact that the
state was awarding contracts to those companies as
part of the DVBE program.
SB 1008 of 2003 (Machado) eliminated LLCs for DVBEs
unless the company was 100% owned by a disabled
veteran.
5. Fraud also came in the disguise of "equipment
brokering." SB 1008 of 2003 (Machado) also eliminated
counting brokered equipment towards satisfying the
DVBE goal.
6. AB 1942 of 2008 (Ruskin) increased the penalty for
violating the CUF clause and allowed the Department of
General Services to recover fraud losses. The bill
made it to the governor's desk, but was a casualty of
the governor's budget ultimatum that year.
7. SB 548 of 2009 (Huff) required proof after the
contract that DVBEs listed on contracts were actually
paid.
8. After those fraud loopholes were closed the most
often used fraud was the exploitation of a "Good Faith
Effort" (GFE) in which companies would pretend to
contact a DVBE, or contact a DVBE for work in fields
other than the work a DVBE did, and then report to the
state that a GFE had been made in hiring a DVBE. At
the time, a GFE could substitute for actual
participation in the program.
ABx4 21 of the 2009 Budget Act eliminated the GFE.
COMMENT
1. One of the complaints of DVBEs over the years is
that there has been no real penalty for fraud.
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2. Since 2003, DVBEs and the Legislature have been
working to close loopholes in the system. SB 548 of
2009 (Huff) worked on finally including a penalty for
defrauding a DVBE.
3. This bill imposes significant and meaningful
penalties against those who commit fraud within the
DVBE and Small Business programs, especially those who
are repeat offenders.
PRIOR ACTIONS
Assembly Jobs 6-0
Assembly Appropriations 17-0
Assembly Floor 67-0
Senate G.O. 6-0
SB 548 (Huff) 9/2/2009
Denham Aye
Correa Aye
Cedillo Aye
Negrete-McLeod Aye
Wyland Aye
ABx4 21 (Evans) 7/23/2009
Denham Aye
Correa Aye
Cedillo No vote recorded
Negrete-McLeod Aye
Wyland Aye
AB 1942 (Ruskin) 8/11/2008
Denham Aye
Correa Aye
Cedillo Aye
Negrete-McLeod Aye
Wyland Aye
SB 1008 of 2003 (Machado)
Senator Denham Aye 9/10/2003
Senator Cedillo Aye 9/10/2003
Assemblywoman Negrete-McLeod Aye 9/8/2003
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Assemblyman Wyland Aye 9/8/2003
AB 669 of 2003 (Cohn)
Senator Denham Aye 9/2/2003
Senator Cedillo Aye 9/2/2003
Assemblywoman Negrete-McLeod Aye 5/15/2003
Assemblyman Wyland Aye 5/15/2003
SUPPORT
Elite SDVOB Network, Northern CA chapter
OPPOSE
Compliance News/Paving Net
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