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, <a href="http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Content/Articl…; target="”_blank”">Look
Before
You Leap: Managing Risk in Global Investments</a>, sheds some
light on this, based on a survey done last year.<br>
<br>
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).<br>
<br>
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.<br>
<br>
<b>Professional Risk Management</b><br>
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?<br>
<br>
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.<br>
<br>
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.<br>
<br>
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.<br>
<br>
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.<br>
<br>
<b>Debarment Lists</b><br>
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.<br>
<br>
States have debarment lists (see, for example, <a href="http://www.dir.ca.gov/dlse/debar.html" target="”_blank”">California's</a>). And
some cities and counties do, as well (see, for example, <a href="http://doingbusiness.lacounty.gov/DebarmentList.htm" target="”_blank”">Los Angeles
County's</a>). 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 <a href="https://www.epls.gov/" target="”_blank”">Excluded Parties List System</a> (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.<br>
<br>
In fact, according to <a href="http://publiccontracting.blogspot.com/2010/05/school-districts-fail-to-…; target="”_blank”">Mike
Purdy's
Public Contracting Blog</a>, "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.<br>
<br>
But debarment usually occurs only after crime convictions, so most
unethical companies do not appear on these lists. <a href="http://www.lni.wa.gov/TradesLicensing/PrevWage/files/DebarList.pdf" target="”_blank”">Washington
State's
list</a> includes companies debarred for prevailing wage,
worker compensation, and other more minor matters.<br>
<br>
Here's what Mike Purdy says in <a href="http://publiccontracting.blogspot.com/2009/09/how-to-check-if-contracto…; target="”_blank”">another
blog
post</a>:<ul>
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.<br>
<br>
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.</ul>
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.<br>
<br>
Robert Wechsler<br>
Director of Research-Retired, City Ethics<br>
<br>
---