The federal grand jury recently indicted Brian Kowert, Sr., former chief operating officer of HBD Construction Company, for five counts of wire fraud related to falsifying the company's participation with a minority business enterprise (MBE) on several construction and redevelopment projects from 2014 through 2022, according to the U.S. Department of Justice.

Kowert, Sr. also served as owner, executive vice president and a project manager on projects in St. Louis and the Midwest. The indictment alleges that Kowert, Sr., defrauded St. Louis and Missouri governments as well as several clients by falsifying records to inflate MBE participation, which was required on those projects.

The indictment alleges that Kowert, Sr., used actual MBE certified companies as "front" companies to pass payments to non-MBE certified companies, which performed work on the project. "The MBE certified companies neither performed work nor provided materials on the projects and had no actual contact with the non-MBE companies which actually performed the work and provided the materials," according to a Grand Jury press release. "The MBE certified companies were paid a nominal fee by Kowert, Sr., for acting as a 'pass through' for the funds paid to the non-MBE companies."

The indictment further alleges that he provided false reports on three separate projects located in St. Louis and Kansas City metropolitan areas and that the client companies, city and state had no knowledge of the alleged criminal activity. The reports accounted for hundreds of thousands of dollars of work. Charges set forth in the indictment are merely accusations and do not constitute proof of guilt.

Most public procurement contracts have participation goals or requirements for disadvantaged groups. Under the U.S. Department of Transportation (DOT), which has the most comprehensive requirements, and some other agencies, the disadvantaged contractor must perform a commercially useful function (CUF) that helps participants develop into financially strong contractors.

It cannot be an extra participant in a transaction, contract or project, through which funds are passed in order to obtain the appearance of disadvantaged business enterprise (DBE) participation. The contractor must perform, manage and supervise the work. For example, with respect to materials, the contractor must (a) negotiate price; (b) determine quality and quantity; (c) order and install the material, where applicable; and (d) pay for the material—the four pillars or touchstones of these projects.

"To participate in these lucrative projects, some contractors have knowingly engaged in DBE fraud to meet the project's DBE requirements, diverting all of the profits to their non-DBE businesses," according to an article by Cohen Seglias Pallas Greenhall & Furman P.C., Passing on the Pass-Through: How to Avoid DBE Fraud Through Due Diligence. "DBE fraud generally takes on one of two forms: a 'front' company or a 'pass-through' company. In the front company scheme, a non-DBE firm creates a DBE company as a front to bid on projects, while ultimately diverting all of the work (and profits) to the non-DBE contractor. In the pass-through company scheme, a legitimate DBE acts as an intermediary, passing the majority of the work on to a non-DBE firm while invoicing the general contractor for the non-DBE's work, plus a small percentage fee (payable to the DBE firm, usually around 3%)."

A variety of programs exist, including minority business enterprises (MBEs), small minority business enterprises (SBEs) or DBEs. Each comes with its own requirements and rules. Having an entity that performs the four pillars, however, does not guarantee a "safe harbor" from violations. On some projects, the disadvantaged business must perform or exercise responsibility for a certain percentage of the contract value. Otherwise, there is a presumption that it did not perform a commercially useful role.

-Bryan Mason, editorial associate