Kickbacks and Local Government Ethics

I find it fascinating that, although kickbacks (also known as "thanks giving") are one of the central elements of unethical conduct in local governments, I have only mentioned them three times in my blog posts.

Kickbacks are a dirty secret for one principal reason:  they are difficult to prove. Along with bribes, they require hard-to-obtain proof to tie money to conduct. Coincidentally, these are the two forms of conduct that the Supreme Court, in Skilling v. U.S., said the federal honest services fraud statute could be applied to (see my blog post on this decision).

Kickbacks and Competitive Bidding
I learned about local government kickbacks early, from the silence that surrounded them in my own town. Several large contracts were not competitively bid. The first selectman and other officials disputed this, arguing that they were once bid out and then renewed (again and again), which counts as being competitively bid.

No one (but me) publicly spoke the name of the principal reason why contracts are not competitively bid:  kickbacks. Let's face it:  no one likes someone so much that they are willing to break laws in order to pay contractors more than the market price for a contract without at least someone trying to get some of that extra money for himself. Financially, it may not matter to the public who gets the money, but it does matter to the incentive for officials either to not competitively bid a contract or to write specifications so that lower bidders cannot bid. And it certainly matters to the public's trust in their local officials.

Government Ethics' Role in Dealing with Kickbacks
Although rarely mentioned, kickbacks are an area where government ethics serves an important role. The principal reason is that ethics codes do not require proof of bribery or kickbacks. If you did not competitively bid out a contract, you have violated the code. If you accepted money directly or indirectly from someone doing business with your government, you have violated the code. The reason why you did it, that is, intent, is not an issue. Tying the money to specific conduct is not something that needs to be proved in an ethics proceeding.

In the world of government ethics, as opposed to criminal enforcement, it is at the very least very unprofessional not to follow procurement laws, and there is no excuse for accepting money or other gifts from those doing business with the city. Ethics enforcement is easier and quicker than criminal enforcement, and even without prosecution, administrations can be thrown out of office, better and more transparent accounting and other procedures can be implemented, and the ethics environment can be improved.

Kickbacks in a Healthy Ethics Environment
It is equally unprofessional to have knowledge of kickbacks, games played with contract specifications, and the like, and to keep this knowledge to yourself. A government official's loyalty is not to colleagues or party, but to the community. A healthy ethics environment makes this loyalty clear. Its leaders insist that the concept of the stool pigeon is for children, not professionals who have a fiduciary duty to their community.

In a healthy ethics environment, leaders in the government, the community, and the news media will publicly ask officials why they failed to bid out a contract. Was it incompetence, laziness, or graft? And they will publicly answer the question, because the ethics environment is devoted to transparency.

Dealing with Those Who Hand Out the Kickbacks
But what about those who hand out the kickbacks? Here's a quote from a recent op-ed piece in Fort Lauderdale's Sun-Sentinel, written by Kendall Coffey, a former U.S. attorney and current legal analyst and partner at Coffey Burlington:

. . . the business people who enable corruption to flourish by facilitating kickbacks are rarely prosecuted with the full force of the law. Few go to prison and many are never even charged with a crime. In the stunning series of more then a dozen public corruption arrests that have engulfed Broward County, the resulting guest lists for federal and state prison have not so far included the enablers from the business community. While there are sound reasons for the overwhelming focus on political figures, an examination of the issue suggests that this result is dictated not by the law, but by the practical realities of prosecuting public corruption.

Why is this true? The principal reason is

the undeniably paramount goal of targeting corrupt officials and bringing them to justice. They are considered much higher value targets because of the power they hold and the trust they betray. It is also evident that prosecuting well-known defendants broadcasts a higher decibel message in the media and therefore, the theory goes, greater deterrence to other potential wrong doers.

There are also legal hurdles, especially the heavy burden of proof applied to the movement of fungible money.

And yet even greater than the challenge of legal hurdles is the scarcity of witnesses willing to step forward and testify against public officials. Even honest business victims who lose opportunities rather than "pay to play" with crooked politicians rarely complain to authorities. These victims believe – perhaps all too correctly – that blowing the whistle could means blowing their chance of ever doing any business at city hall in the future.

So the law enforcers are dependent on sting operations, which involved fictitious schemes as well as dishonest people who are given immunity. Even when business people do turn state's evidence, there is a problem:

If the private sector accomplices can avoid jail by "turning state's evidence," in the infrequent case in which they are caught, the message of deterrence may ring loudly for politicians but merely whisper to the business community that holds the key.

Little of this is a problem in government ethics, at least where it does not involve criminal laws, criminal penalties, and prosecutors. But it is important that ethics commissions take jurisdiction over those doing business with the local government. If they want the contracts and the approvals, contractors and developers have to be willing to cooperate with the ethics commission, follow its laws, ask for its advice, take its training classes, testify before it, and fear losing contracts or approvals if they violate the ethics code or refuse to cooperate.

Contract Games
I am always surprised how little people seem to (and act as if they) understand the games that can be played with contracts to ensure the bid goes not to the bidder best for the public, but rather to the bidder best for the officials involved. Here's a list from the Birmingham FBI office:

Contract corruption usually involves the payment of bribes or kickbacks to local or state officials in exchange for favorable treatment on government contracts. Potential subjects are private contractors, anyone acting on their behalf, and public officials involved in the contracting process (procurement officers, purchasing agents, city councilpersons, and county commissioners). Favorable treatment includes: improper disclosure of bid information; narrow tailoring of contracts to benefit a certain company (sole source contracts); improper disqualification of competitors from the bid process; support or voting for the bribing contractor; and approval of false invoices, improper change orders, or cost overruns on behalf of the bribing contractor.

A simple little laundry list that every local government official, procurement employee, good government advocate, and journalist should have in his or her wallet.

Here's another laundry list of bid rigging methods, from the Wikipedia Bid Rigging page:

Subcontract bid rigging occurs where some of the conspirators agree not to submit bids, or to submit cover bids that are intended not to be successful, on the condition that some parts of the successful bidder's contract will be subcontracted to them. In this way, they "share the spoils" among themselves.

Bid suppression occurs where some of the conspirators agree not to submit a bid so that another conspirator can successfully win the contract.

Complementary bidding, also known as cover bidding or courtesy bidding, occurs where some of the bidders bid an amount knowing that it is too high or contains conditions that they know to be unacceptable to the agency calling for the bids.

Bid rotation occurs where the bidders take turns being the designated successful bidder, for example, each conspirator is designated to be the successful bidder on certain contracts, with conspirators designated to win other contracts. This is a form of market allocation, where the conspirators allocate or apportion markets, products, customers or geographic territories among themselves, so that each will get a "fair share" of the total business, without having to truly compete with the others for that business.

Of course, there are also other clever schemes. For example, this year the mayor of Niles, IL was sentenced to prison for taking kickbacks to force businesses to use a friend’s insurance company. Misuse of office without any cost to the taxpayer, but still highly unethical.

Robert Wechsler
Director of Research-Retired, City Ethics

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