Kickbacks and Local Government Ethics

Anonymous

Fri, 11/26/2010 - 04:07

Complicity and Knowledge

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 <a href="http://www.supremecourt.gov/opinions/09pdf/08-1394.pdf">Skilling
v. U.S.</a>, said the federal honest services fraud statute could be
applied to (see <a href="http://www.cityethics.org/content/supreme-court-decision-honest-service…; target="”_blank”">my
blog
post</a> 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 href="http://www.sun-sentinel.com/news/opinion/sfl-newmezzpost-coffey-103110,…; target="”_blank”">a
recent
op-ed piece in Fort Lauderdale's Sun-Sentinel</a>, 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 href="http://birmingham.fbi.gov/priorities.htm" target="”_blank”">a list from the
Birmingham FBI office</a>: 
 
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 <a href="http://en.wikipedia.org/wiki/Bid_rigging" target="”_blank”">Wikipedia Bid Rigging
page</a>:

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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