Managing Risk and Tracking Unethical Companies

Local governments cannot afford to do the level of due diligence that corporate compliance offices do on a regular basis. But it is worth looking at how corporate compliance offices and corporate executives deal with other entities that are found to be involved in unethical activities. A report just out from Deloitte, Look Before You Leap: Managing Risk in Global Investments, sheds some light on this, based on a survey done last year.

Before I get into the report, I think it's worth noting the mindset reflected in the title:  dealing with individuals and entities with a history of unethical or corrupt conduct is, from a professional point of view, a matter of managing risk. The risk is not only to the reputation of the officials who deal with such individuals and entities, but also, more important, to the reputation of the local government (there are often monetary consequences, as well).

Every time it comes out that a corrupt contractor has been given a contract, or a contribution from someone with a history of corruption has been accepted by a candidate, it undermines the public's trust in their local government. It makes not only the particular candidate or procurement official look bad, but the entire government. If this one instance has come out, how many others are there? people will reasonably wonder. And they are right. Usually one instance is the tip of an iceberg.

Professional Risk Management
Why? Because in a professional organization, where officials manage risk, they wouldn't think of taking a contribution from someone with a poor ethical history. Could it possibly be worth the money?

In a professional organization, if a company has been barred from doing business with the state, or with other local governments, then you certainly do not give that company a no-bid contract. And you do due diligence in dealing with any bid that company makes.

In my town a few years ago, campaign contributions to the first selectman (effectively the mayor) were accepted from four vice presidents (listed only as engineers) of a construction company that had given a bribe to a nearby city manager (only the manager, of course, was prosecuted), and the company was given a contract despite the fact that there was a current scandal involving the company at the state level. When this information came out, nothing was done.

That reflects a local government that does not manage risk at all and cares nothing about its government's reputation, but only about admitting to conduct and looking bad themselves.

How do corporations act? According to the Deloitte report, 63% of respondents said that they had aborted or renegotiated a deal after learning of anti-corruption issues involving another company. And 80% of the respondents did not wait passively to hear about problems; they looked closely at the compliance programs and controls of companies they do business with.

Debarment Lists
Local governments need to better publicize lists of companies and individuals they will not do business with, based on successful prosecutions and other judicial or quasi-judicial processes. Of course, a local government can't put a company on a list based on a hunch or hearsay, but you can look into the matter more closely, and report a company if you find possible criminal or unethical conduct.

States have debarment lists (see, for example, California's). And some cities and counties do, as well (see, for example, Los Angeles County's). But these lists should all be brought together in one place, either with links to all of them or, even better, in one big database, something similar to the federal Excluded Parties List System (EPLS) (or even as part of it). It's in every local government's interest. If the federal government is not interested, perhaps the League of Cities could take on the job, with a government or foundation grant.

In fact, according to Mike Purdy's Public Contracting Blog, "If you receive any federal funding for projects for your agency, remember that you are required to verify that the party you are contracting with has not been debarred or suspended by the Federal government.  This requirement applies for any contract exceeding $25,000." This verification is done by checking the EPLS database mentioned above or by getting a debarment and suspension certification from vendors.

But debarment usually occurs only after crime convictions, so most unethical companies do not appear on these lists. Washington State's list includes companies debarred for prevailing wage, worker compensation, and other more minor matters.

Here's what Mike Purdy says in another blog post:

Failure of public agencies to check state and/or federal debarment lists is a frequent audit finding against public agencies. After checking whether a contractor is debarred, a public agency must maintain documentation in the contract file with a printout from the applicable website indicating the contractor is not debarred.

Failure to check the appropriate list of debarred contractors may result in a public agency using a contractor with a poor performance record that may result in significant problems in the administration of a project.

This is another example of why local government ethics is more a matter of acting professionally and responsibly than it is about personal morals. Officials who learn how to manage risk in the professional rather than personal sense will not only run into many fewer problems, but will also protect their government's standing in the community, as well as its use of public funds.

Robert Wechsler
Director of Research-Retired, City Ethics

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