Guest Column
Suppliers at Risk
By: Jennifer Harvey, Esq.
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ost suppliers having no direct relationship with
a public owner have generally not considered
themselves to be at risk for liability under the
state or federal versions of regulations dealing with the
use of disadvantaged business enterprises (“DBEs”),
women-owned business enterprises (“WBEs”) and
minority-owned business enterprises (“MBEs”). That is
no longer the case.
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primes then allegedly certified that AIB had negotiated
and delivered materials that Waterworks had provided.
The government contended that Waterwork’s conduct
enabled the primes to certify falsely that materials were
supplied by AIB when Waterworks, the primes and AIB
“knew” that this was not the case, resulting in false
claims for payment to the government by the primes.
Until recently, construction fraud and False Claims
Act based enforcement focused largely on whether
DMWBE subcontractors were capable of performing the
construction work for which they had been engaged or
were, conversely, “fronts” for work actually performed,
or equipment supplied, by the prime contractor.
Brick Church Rd.
Tray NY 12180
518-279-3265
Those investigations continue, but the crosshairs of
investigators are now centered squarely on suppliers in
a twist in which the DMWBE supplier is alleged to be a
pass-through for the “true,” non-certified, supplier.
Two months ago, the Northern District of New
York announced a $4,495,000 settlement under the
False Claims Act paid by HD Supply Waterworks
(“Waterworks”), a non-certified supplier lacking any
privity with the contractor and making no certification
for payment to the government.
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Settlement documents detail allegations that DBE
supplier American Indian Builders & Suppliers, Inc.
(“AIB”) and various prime contractors represented on
federally assisted contracts that ATE had performed
a “commercially useful function” by negotiating
price and other terms of sale when in actuality, the
prime contractors had directly negotiated terms with
Waterworks and used AIB only as a “pass through.”
Allegedly, AIB collected invoices from Waterworks,
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AIB invoices, added a markup, and then passed its DBE
invoices on to the prime contractors for payment. The
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140 W Barbee Street
Zebulon, NC 27597
919-598-6921
sceecustuc 1175 Hoosick Rd.
Tray NY 12180
2256 Broad St.
518-279-0715
Frankfart NY 13340
315-724-4062
440 W Barbee Street
Zebulan, NC 27597
919-957-3310
WIT EXCBVAT9N
Hoosick Rd.
Tray NY 12180
518-279-3967
Heavy Highway Construction
Commercial Blacktop Paving
Site Development
Sand and Gravel
Airports
Landfills
Equipment Sales and Rental
www.Rifenburg.com
The Waterworks settlement centered on the conduct
of a non-certified supplier who made no certification
to any government entity for payment, and who is not
alleged, at least according to settlement documents, to
have falsified invoices or any other documents. It must
also be noted that in settlement documents, there is no
admission of liability by Waterworks.
Guest Column
A protypical fact pattern: prime contractor contacts
a non-certified supplier for a quote for all its project
supplies, which the supplier provides. The contractor
uses the quote as the basis for its bid. If the prime is
awarded the contract, then within a very short period of
time it must identify the method by which it intends to
fulfill its DMWBE project goals. If goals cannot be met
via DMWBE subcontracting, as is often the case with
the recently enlarged goals, then prime contractors
must resort to the use of DMWBE-certified suppliers to
fill the shortfalls.
At this point, the potential for risky behavior arises.
If a DMWBE supplier is identified, and (i) agrees to
purchase all its supplies from the non-certified supplier,
generating only the invoices to the prime and purchase
orders to the noncertified supplier (ii) does not directly
fulfill any purchase order which are fulfilled by the
non-certified supplier, (iii) receives payment from the
prime and remits payment, minus a percentage, to the
non-certified supplier then following the analysis in
Waterworks, the supplier could stand accused of fraud
under the False Claims Act.
This seems counter-intuitive. The prime has made
the certification for payment to the government. The
prime has obtained the benefit ofthe credits toward the
DMWBE goals. Unlike the DMWBE supplier the noncertified supplier is not a sham. Moreover the DMWBE
supplier has been affirmatively certified as a supplier
of certain types of goods by the government. Many
suppliers and contractors have difficulty accepting that
the use of a certified entity for its certified function is
not bulletproof protection from a sham. It may not
be. For example, AIB, the DBE supplier in Waterworks
had multiple certifications in multiple states and has
only recently been decertified in New York as a WBE
and MBE broker even though federal investigation of
it began in 2008 according to settlement documents.
In a case in the Southern District of New York, United
States v. Aaron Tubbs, a project manager was charged
with mail fraud based use ofan MBE scheme where credit
for more than $4.8M of structural steel was “passed
through” an MBE. After the purchase of the steel was
negotiated, the project manager allegedly informed the
non-certified supplier that the steel purchase needed
to be run through an MBE “for minority purposes.” A
series of emails then described how the transaction
would supposedly be structured. The MBE selected
allegedly had a one-room office, no warehouse and
no ability to handle, store or deliver structural steel.
As relevant here, the complaint suggests active and
ongoing investigations of potentially unindicted
supplier conspirators, identified in the document as
“General Contractor—i” and “Supplier-i.”
At the most basic level, a DMWBE supplier on a public
project must perform a “commercially useful function”
as defined in regulation and statute. The amount of
credit that may be attained depends on whether that
function is of a broker or a supplier which generally gets
much more credit. In order to be considered a supplier
or regular dealer under current standards, a DMWBE
should be an established business that engages, as
its principal business and under its own name, in the
purchase and sale or lease of products of the same
general character as those involved in the contract and
for which DMWBE credit is sought. Except for suppliers
of bulk products, such as fuel or aggregates, it should
maintain a store, warehouse, or other establishment
where the products are bought, kept in stock, or sold
or leased to the public in the usual course of business.
To avoid becoming a subject or target of an expensive,
intrusive and potentially business-destroying DMWBE
fraud investigation, suppliers must avoid participating
in arrangements where DMWBE suppliers are arguably
serving merely as pass-throughs.
When asked to work with a DMWBE supplier noncertified suppliers should have ready procedures
capable of confirming the DMWBE’s commercially
useful function and ensuring that they are not being
pulled into a risky transaction. Suppliers, just like
contractors, should strengthen and develop their
internal compliance processes and work to educate
their employees and industry business partners on
avoidance of pass-through arrangements.
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