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A Simple Key to Understanding Corruption in the Construction Industry

Blake A. Coppotelli Sept. 30, 2015

In the 14 years since I left the New York County District Attorney’s office as Chief of the Construction Industry Strike Force and Labor Racketeering Unit, not much has changed in the metropolitan-area construction industry. It is still rife with fraud and corruption. A year does not go by without some major multi-defendant indictment being announced or a complex federal or state government investigation being disclosed that alleges some type of criminal misconduct.1

The issue is so concerning, and the misconduct so prevalent, that on August 5, 2015, the Manhattan District Attorney’s Office, the New York City Department of Investigation, the Port Authority of New York and New Jersey, Office of the Inspector General, the Metropolitan Transportation Authority, Office of the Inspector General, and the Business Integrity Commission for the City of New York announced the formation of a multiagency Construction Fraud Task Force to identify and prosecute payoffs and construction schemes on metropolitan-area projects.

What is clear is that fraud, kickbacks, and bribes are the norm on every sizable private or publicly funded construction project in the New York area. Whether it is just a significant interior renovation or the construction of a brand new building, one thing is guaranteed: some aspect of fraud and corruption will touch your project. If you are a commercial tenant, landlord, government agency, building manager, developer, or even a lending bank (Tier 1, see below), your reputation and the integrity of your financial commitments are continuously being impacted by the rampant fraud and corruption occurring in the industry.

This article is intended to set out a very basic and simple key to understanding where corruption can infiltrate a complex construction project. With this key, hopefully, government agencies and/or private companies funding projects can have a more precise guideline to help (1) assess their corruption risks and establish controls that can minimize the criminal behavior, (2) implement effective internal and external compliance or forensic reviews to act as a deterrent and detect corruption at the risks spots identified in the key, and (3) determine the appropriate levels of expertise and resource allocation needed to carry out the adopted controls and forensic reviews.

Whether your project is a “core and shell” or an “interior” renovation, to decrease or eliminate the risk that corruption will touch your project, you have to understand the risk spots. To understand the risk spots, you must have a basic understanding of the critical relationships that are inherently vulnerable to corruption on your project.

Generally, there are five tiers on a major project in the metropolitan area. The tiers are:

Below is a simple illustration of this structure.
image 1

The arrows in the above illustration represent the flow of contracts and the payment of money within the structure. The weak spots for corruption exist between the tier personnel who have the responsibility for awarding a contract (or approving an invoice) and the tier that is being given the contract (or submitting an invoice). These relationships are the basic corruption risk spots on your project. Discussed more fully below, the key is to understand each relationship and then to assess the strength of your procedures and controls to prevent or detect the potential corrupt behavior. If you address the weaknesses at each critical risk point, you can significantly reduce the likelihood that your project will become the victim of corruption and the focus of a federal or state investigation. It should be noted that law enforcement focuses on these spots in developing an industrywide investigative strategy and approach and, once a complex corruption investigation begins, law enforcement expands or reduces its investigative objectives and measures depending on the existence of evidence that suggests that corruption may be occurring within the other relationships identified above.

A simple key to identifying these potentially corrupt relationships is as follows.
image 2

The numbers represent each point within your project where a potential corrupt relationship can exist, as noted by the arrows connecting the tiers. The arrows also represent the direction of the kickback or payoff to the tier influencing or determining the award of a contract from the tier seeking the work and providing the bribe.

Generally, as shown in the key, there are ten basic corruption risk spots on large construction projects in the metropolitan area: