Missouri Court Case Highlights Fraud Risk in DBE Programs

Disadvantaged Business Enterprise (DBE) programs are intended to aid small businesses owned by minorities, women or service-disabled veterans. However, these programs can create holes for fraudsters to take advantage. Under the False Claims Act (FCA), whistleblowers or "relators" are provided incentives to bring complaints or lawsuits against any enterprise or person who defrauds the federal government.

A certain percentage of participation is required for disadvantaged contractors in order to be involved in construction projects. "Anyone involved in a project with a DBE is required to complete due diligence," said Chris Ring of NACM's Secured Transaction Services. "And anyone selling to these contractors now has to verify that who they are selling to is a legitimate disadvantaged enterprise. The material supplier can get caught up in a mess and prosecuted under the False Claims Act at the state or federal level if it turns out that they are not selling to a legitimate DBE contractor."

DBE programs can be taken advantage of when non-DBE companies use them as a front to perform work at lower costs, keeping the extra profit. A recent case in January brought against HBD Construction Inc., in St. Louis, Missouri highlights the importance of due diligence—as the offending company pretended to qualify for a DBE program. The former owner and chief operating officer, Brian Kowert Sr., pleaded guilty to two counts of wire fraud, according to a press release from the U.S. Attorney's Office.

At the time, Kowert was also acting as the project manager for the renovation and redevelopment of a building for Greater Goods LLC on Chouteau Avenue in St. Louis. Kowert and Charles Kirkwood, the owner of Midwestern Construction, a company that was a Minority Business Enterprise, agreed to falsely list Kirkwood's company as providing materials and performing work on the project. Kowert sought to falsify the information to comply with St. Louis requirements for 25% participation by MBEs to qualify for a 10-year tax abatement.

In more complex DBE fraud cases, multiple parties are impacted, not limited to the general contractor. "It's critically important for credit managers and material suppliers to check for DBE participation," said Ring. "When involved with large public-work projects, responsibility falls on the credit department to verify the legitimacy of a DBE contractor. This type of fraud is not something that you, as a credit manager, want to be caught in the middle of."

Beginning on Aug. 4, 2020, Kowert caused 14 HBD checks with a total value of about $220,000 to be issued to Kirkwood's company for the work performed and materials provided by the three non-MBE companies. Kirkwood deposited those checks into his company bank account and then issued checks to the three non-MBE companies, at Kowert's direction. Kowert then used Kirkwood's company as a fraudulent "pass through" in order to exchange the checks and violate the MBE requirements on the construction project.

Between May 2021 and November 2021, "Kowert and HBD caused a false application for tax abatement on behalf of Greater Goods for the Chouteau Avenue redevelopment project to be submitted to the St. Louis Development Corporation," the press release reads. "The application falsely represented that Kirkwood's MBE company had performed about $224,361 in project costs and omitted the three non-MBE companies. The $224,361 comprised approximately 6.5% of the required 25% MBE participation in the project."

-Kendall Payton, editorial associate

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Monday, 27 May 2024

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