Case Shows 'Trust but Verify' an Important Guiding Principle for Suppliers, Subs

A famous quote from the Cold War era, “Trust but verify,” is back in fashion on Capitol Hill and in many business instances, as many circumstances continually dictate its prudence. A recent fraud case out of Minnesota related to a public works project covered by the Minnesota Little Miller Act is a great example of the pertinence of this quote.

Scott County, MN authorities charged Gerard Roy on five counts of forgery, alleging he forged bond documents, including the payment bond, designed to protect subcontractors and material suppliers in the event of non-payment. Roy, of RSI Associates Inc., prepared the documents in question to win a contract on a government project last summer. Various subcontractors continue to wait on payments related to the project even though the municipality where the work was conducted (Hastings, MN) paid RSI in excess of $100,000 for cement and electrical work.

“The travesty in this case, is that what is considered ‘normal’ protocol for subcontractors and material suppliers—obtaining a copy of the bond and assessing the rating of the bonding company—most likely would not have uncovered this fraud,” said Chris Ring, of NACM's Secured Transaction Services. “An additional protocol—contacting the bonding company to assure the bond covers the related project—could have been completed to potentially uncover this fraud as well.”

Ring notes that fraud cases such as this are the exception rather than the rule. Business norms aside, a subcontractor or a material supplier on this type of project would best be served by assuming the potential of a worst-case scenario exists. “This exceptional case could result in a write-off, as the government will likely shield itself from responsibility related to this fraudulent act.”

- Brian Shappell, CBA, CICP, NACM managing editor

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