Bid Rigging, Organized Crime, and State Takeover of Cities
According to <a href="http://www.economist.com/node/21563351" target="”_blank”">an
article in last week's <i>Economist</i></a>, 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.<br>
<br>
What about over here? According to <a href="http://www.montrealgazette.com/news/Charbonneau+Commission+Montreal+clo…; target="”_blank”">an article in the Montreal <i>Gazette</i> this week</a>, 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."<br>
<br>
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 <a href="http://articles.chicagotribune.com/2012-09-27/news/ct-met-rudy-fratto-s…; target="”_blank”">an article in the Chicago <i>Tribune</i></a>, a Mafia member was sentenced
for rigging bids on forklift contracts at McCormick Place in
Chicago.<br>
<br>
But it isn't just the Mafia that participates in bid rigging. Nor
does bid rigging necessarily involve local officials. On June 21,
<a href="http://www.rollingstone.com/politics/news/the-scam-wall-street-learned-…; target="”_blank”"><i>Rolling Stone</i> ran an article by Matt Taibbi</a> 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 —<i>United States of America v. Carollo, Goldberg and
Grimm</i>, in which three GE Capital employees were convicted
under "obscure antitrust violations." Taibbi says that this was the
first evidence of:<blockquote>
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...</blockquote>
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.<br>
<br>
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 <a href="http://news.providencejournal.com/breaking-news/2012/09/ex-central-fall…; target="”_blank”">an article in the Providence <i>Journal</i></a>. This makes one wonder about
the city's ethics environment.<br>
<br>
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.<br>
<br>
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?<br>
<br>
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.<br>
<br>
Robert Wechsler<br>
Director of Research-Retired, City Ethics<br>
<br>
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