Bid Rigging, Organized Crime, and State Takeover of Cities

According to an article in last week's Economist, last year 22 local councils in Italy were disbanded and taken over by the national government due to alleged infiltration by organized crime. This is an extreme way to deal with a poor local government ethics environment. But it's a very difficult problem for a local government to deal with.

What about over here? According to an article in the Montreal Gazette this week, a commission studying corruption in Montreal, the Charbonneau Commission, heard evidence that "multiple fields of the construction industry in Montreal and surrounding regions were controlled by a small group of contractors who took turns 'winning' bids, and paid a percentage on the value of every public contract to the Mafia." The Mafia was paid via false billing. "Any contractor who tried to break into the system quickly learned that the Montreal market was 'hermetically sealed,' and that it was best to go elsewhere."

This is a typical form of bid rigging that has been associated with the Mafia in construction and waste disposal for a long time. Another example came to light in Chicago last week. According to an article in the Chicago Tribune, a Mafia member was sentenced for rigging bids on forklift contracts at McCormick Place in Chicago.

But it isn't just the Mafia that participates in bid rigging. Nor does bid rigging necessarily involve local officials. On June 21, Rolling Stone ran an article by Matt Taibbi entitled "The Scam Wall Street Learned From the Mafia: How America's biggest banks took part in a nationwide bid-rigging conspiracy - until they were caught on tape." It involves the case of  —United States of America v. Carollo, Goldberg and Grimm, in which three GE Capital employees were convicted under "obscure antitrust violations." Taibbi says that this was the first evidence of:

a breathtakingly broad scheme to skim billions of dollars from the coffers of cities and small towns across America. The banks achieved this gigantic rip-off by secretly colluding to rig the public bids on municipal bonds, a business worth $3.7 trillion. By conspiring to lower the interest rates that towns earn on these investments, the banks systematically stole from schools, hospitals, libraries and nursing homes – from "virtually every state, district and territory in the United States," according to one settlement. And they did it so cleverly that the victims never even knew they were being ­cheated. No thumbs were broken, and nobody ended up in a landfill in New Jersey, but money disappeared, lots and lots of it...

Sometimes, cities get into a lot of financial trouble, and it's not clear whether the Mafia was involved directly, indirectly, or not at all. For example,the city of Central Falls, R.I. went into receivership in 2010, supposedly for financial reasons alone. Rhode Island is infamous for its Mafia operations, which have sometimes involved local governments. But there does not appear to be a clear tie to the Central Falls bankruptcy.

However, the city's mayor pled guilty last week to federal corruption charges involved with a kickback (in the form of home renovations) from a $1.7 million "emergency" contract to board up foreclosed homes in the city, according to an article in the Providence Journal. This makes one wonder about the city's ethics environment.

Nearby Providence is on the verge of bankruptcy, due in part, according to a report commissioned by the city, to a serious lack of transparency in budget procedures, including the transferal of funds from the city's cash reserves without proper approval, and the failure to provide financial information on a timely basis to auditors or the council.

Unlike in Italy, state governments do not take over councils when they have been infiltrated by organized crime. But they do take them over when their financial situation becomes dire. And in some cases, the cause might very well be organized crime. The six bankrupt cities in Michigan are probably there due to the terrible local economy. The three cities in California are most likely a combination of poor management and a poor ethics environment. But what about Nassau County, NY and Harrisburg, PA (not to mention Central Falls, RI), all of which have been taken over by outside authorities?

Of course, it's hard to know whether organized crime is involved in particular ethical misconduct relating to local governments, or how much. Even in Chicago, the court found that it could not charge the bid rigger with any organized crime offense. And it's unlikely that an entire council would be infiltrated and have to be taken over by a state. But organized crime can be an important part of the intimidation factor in ethical misconduct (both in reality and to scare people into silence when there is no organized crime involvement). And organized crime can be involved, directly or indirectly, in procurement problems. It's something to keep in mind.

Robert Wechsler
Director of Research-Retired, City Ethics

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