Three western New York construction contractors and two of the firms’ owners have agreed to pay more than $3 million to settle federal charges that they set up a “front” company that enabled them to improperly receive federal contracts designated for businesses controlled by disabled veterans, the Dept. of Justice says.

The parties to the settlement, which DOJ announced on Oct. 3, include defendants Zoladz Construction Co. Inc. (ZCCI), Arsenal Contracting LLC and Alliance Contracting LLC—all based in Alden, N.Y. ; along with John Zoladz of Darien, N.Y.—who owns 49% of Arsenal, 51% of Alliance and 100% of ZCCI—and David Lyons of Grand Island, N.Y., whom DOJ identifies as another part-owner of the companies.

The Justice Dept. alleged that Zoladz hired a service-disabled veteran to be a “figurehead” for Arsenal. The veteran is unnamed in the settlement.

Arsenal called itself a service-disabled-veteran-owned small business (SDVOSB) but it was really run by John Zoladz and Lyons, neither of whom is a service-disabled veteran, according to DOJ.

According to the settlement agreement, between 2008 and 2011, Arsenal received about $21 million in federal contracts set aside for disabled-veteran-owned small businesses. The document indicates that the contracts were issued by the Dept. of Defense and Dept. of Veterans Affairs.

DOJ claimed Arsenal was a “sham company” that had few employees of its own. The department also alleged that Arsenal drew on Alliance and ZCCI workers to carry out the contracts, although the government requires that a veteran-owned firm spend at least 15% of the contract-related personnel costs on its own employees.

DOJ said the claims resolved by the settlement are only allegations and that there has been no determination of liability.

ZCCI said in a statement, “Even though we had legal advice that the formation of the Service Disabled Veteran Owned Business firm involved was in compliance, the ever-changing rules made it difficult to clearly stay within a difficult landscape of compliance.”

The company added, “All contractors procured by the SDVOB were performed to the satisfaction of all parties, including subcontractors and material suppliers, were fully compensated.”

ZCCI said, “We are glad to have this matter fully resolved and look forward to continuing to serve the needs of our customers and community with award-winning construction work.”

The case arose from a lawsuit filed in September 2011 by what is now the New York Foundation for Fair Contracting, under the False Claims Act’s whistleblower provisions.

Under the agreement, the foundation is to receive about $45,000—15% of the settlement amount.

Zoladz describes itself on its web page as “a large civil-works, demolition and trucking contractor” that has completed projects in New York, Florida, Kentucky, Louisiana, Maryland, Mississippi, North Carolina, Ohio, Pennsylvania and Texas.

James P. Kennedy Jr., Acting U.S. Attorney for the Western District of New York, said in a statement: “Although this investigation did not uncover sufficient evidence to establish criminal liability by these entities and individuals, the multi-million-dollar civil judgment ensures that those involved pay a heavy price for their decision to divert to themselves resources intended for the benefit of those who have made supreme sacrifices on behalf of all.”