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DeKalb County (GA) Grand Jury Report on Procurement-Related Misconduct
Wednesday, October 23rd, 2013
Robert Wechsler
It all started with the indictment, on charges of bribery and theft,
of a Fats, Oil & Grease inspector back in November 2010. It led
to an 83-page grand jury report in August 2013, which set out the misconduct involving the DeKalb County (GA) Department of
Watershed Management (DWM) procurement process, and made
recommendations not only for indictments, but also for an improved
ethics program. The story that the grand jury tells in its report is
a classic case of institutional corruption in a procurement context,
relating to a division of the Public Works department and a large construction project.
Just about every procurement-related ethics violation occurred, and
many people were involved or knew what was going on.
The act that led from the indictment to the grand jury report was the courageous decision of then DWM Deputy Director Jo Ann Macrina to tell the district attorney that the corruption in the DWM went far beyond this one employee. According to the grand jury report, the county police department had, in August 2009, begun an investigation into allegations regarding invoice padding, contract fraud, and bid rigging in the DWM. The investigation, she said, was now being hindered by the police department.
The investigation itself was limited. It focused on contracts between the DWM and a tree service company. The company was believed to have been overbilling the DWM, with the assistance of DWM employees, including a deputy director's brother-in-law, who was employed by multiple DWM contractors.
This might sound like small potatoes, but the first contract was for the sum of $8.8 million. In fact, the entire project, known as the Capital Improvement Program, was to cost $1.35 billion. DeKalb County has a population of about 700,000, and includes Decatur as well as about 10% of the city of Atlanta.
Nepotism, Kickbacks, Overbilling, and a Cover-Up
The tree service company was a small company located outside the state. It was far too small to have considered bidding on the contract on its own. But its owner had met a local businessman through a common friend, and had made a deal to give the businessmn 11% of the company's earnings as a "finder's fee," which he was to share with the brother-in-law who worked for DWM contractors. Such contingency fee contracts are prohibited by law in DeKalb County.
Things get complicated here, but involved individuals with personal and family relationships to a powerful deputy director and his appointee, all of whom became involved in the overbilling scheme. That is, this first piece of the puzzle that came out involved itself covered a wide range of government ethics violations: misuse of office, nepotism, contingency fee contracts, kickbacks, and cronyism.
It's worth noting that, from the beginning, there were questions about the competence of the contractor's work. Not only was there an overexpenditure of government money, but the work done was below expectations, increasing the cost to the community. This is often the case when there are kickback schemes featuring nepotism and cronyism.
It's also worth noting that, when an investigation threatened county officials, there was a cover-up, implicating the police department in addition to the DWM and high-level county officials.
In addition, it turns out that an inspector not only knew about the company's overbilling, but reported it to the two deputy directors involved in the scheme. When told to sign off on the invoices, however, he did so. Had he had a hotline to which to report the overbilling, it's possible that he would have filed a report. If he had been required by law to report the overbilling, it is also more likely that he would have.
Subcontractors
Many ethics codes and procurement rules are limited to contractors, those who are directly responsible to the government. But subcontractors often do all or nearly all of the work. That was the case when the tree service company was told it needed a "black face" to keep the contract. An African-American friend of the company's owner signed the papers, with the plan that the same tree service company would do all the work as a subcontractor.
The other problem here was a lack of verification. The front man had no experience in tree service. His bid would have been rejected if there had been the slightest investigation.
Contract Splitting
Most jurisdictions have an amount below which a contract does not have to be bid. Sometimes, officials collude with contractors to get around competitive bidding via contract splitting, the creation of purchase orders just under the limit (in DeKalb County $50,000) that can add up to no-bid contracts in the millions of dollars. That's what happened in DeKalb County, with 14 different contractors. One of them received $2.6 million over three years, without having to make a bid. It was listed as having only a $50,000 contract.
Outside Approval
Not only did this contract splitting allow contracts to get around the competitive bidding process, but it also ensured that the contracts would not have to be approved by anyone outside the department. In this instance, the contracts would have to be approved by the board of county commissioners. It is better that an independent, centralized office, such as an auditor, inspector general, or ombuds, reviews and approves all contracts, whether bid or not.
Pay-to-Play Hiring and Contingency Fees
Multiple contractors and subcontractors hired a DWM deputy director's twin brother as a consultant, although he had no experience in the field, and they won contracts. After one contractor fired the twin brother, its bids were rejected and work under its current contracts was reduced or ended.
Contingency fee language for the brother's consulting contracts was developed by his sister, then a judge, and a county attorney serving then as the Assistant Director of Purchasing and Contracting. The county's manual entitled "Ethics in Public Purchasing for DeKalb County," making such contingency fees illegal, had been originally submitted to this very county attorney.
Failure to Withdraw from Participation
A DWM deputy director who sat on bid selection committees did not withdraw from participation regarding a $20 million contract her brother-in-law was involved in bidding on. He won the contract, and appears to have been a central figure in, and major beneficiary of, the various schemes outlined in the grand jury report.
According to the report, "one subcontractor ... testified that [the brother-in-law] told [a bidder he worked for] that they had nothing to worry about because [the sister-in-law] would be on the selection committee for the contract award." But subcontractors are rarely brought into a government ethics program, do not feel bound to report such misconduct, and know that nothing will happen to them if they do not.
Local Participation Requirements
This huge project has a 20% Local and Small Business Enterprise (LSBE) participation requirement. What this means is that every large contractor that wants to make a bid has to work with a limited number of local small businesses in the field. This gives these small businesses a great deal of power, which can be misused. And it also encourages the creation of local small businesses that will fit the bill, even if they lack the expertise.
The grand jury, in recommending the elimination or substantial revision of the program, notes that "one common abuse has featured non-LSBE firms who partner with, and sometimes create, sham firms who meet LSBE eligibility criteria on paper but who perform no actual work - or, in the words of LSBE regulations, perform no 'commercially useful function' - on the government-funded project."
For any government wondering how to better control such a program, this report contains some good recommendations.
The County CEO
The county CEO has a great deal of power with respect to DWM operations and especially this big project. The grand jury says that the CEO was involved in the schemes in several ways, and provides details for each:
1. The solicitation of campaign contributions from contractors.
2. The cancellation or attempt to cancel contracts in order to create an "emergency situation." This allows the CEO to enter into a no-bid contract with another contractor.
3. The cancellation of contracts and the non-issuance of work to contractors for punitive and political reasons.
4. The selection of bid selection committee members, despite the fact that major campaign contributors are likely to or have already submitted bids.
5. Ex parte communications with committee members and bidders during the active evaluation period.
6. Interference with and/or alteration of a selection committee's final recommendation, prior to its submission to the Board of Commissioners, in favor of vendors represented by a particular lobbyist or vendors with a history of making and raising large campaign contributions.
Grand Jury Recommendations
The grand jury recommended the indictment of at least twelve individuals. The charges include bid rigging, kickbacks, manipulation of the selection committee process, theft, and perjury.
It also recommended a reorganization of the county government. It points to the "over-reliance on County staff and departments who ultimately report to an elected official," arguing that it "provides too many opportunities for
fraudulent influences and fosters a culture that is overly politicized and in which inappropriate business relationships are created. Inept policies and procedures and an attitude of non-compliance with same has been a strong thread throughout our investigation."
In effect, it recommends a change from mayor-council to council-manager form of government, a change that is, sadly, not the current trend. What people tend to see as the accountability of a single leader often gives that leader too much power.
As part of the change in form of government, the grand jury recommended that the county commissioners be full time, so that they can be better focused on and informed about what goes on in the county government, and also because this "would help to eliminate potential conflicts between their private life and public responsibility."
The grand jury recommended "a comprehensive and enforceable code of ethics." It wrote, "Ethics is of such importance that our recommendation is for DeKalb County to create a full time Ethics Officer position, supported with proper departmental resources, that reports to the Board of Commissioners. The sole purpose of this position and department will be to establish and enforce new ethical guidelines for employees, vendors and elected officials." It recommended using Atlanta's ethics program as a model, but failed to recognize that Atlanta's ethics officer reports to the ethics board, not to the city council.
The grand jury was especially concerned that the members of the ethics board were political appointees (Atlanta's are selected by community organizations, as City Ethics recommends). It also notes that the Board of Ethics website has not been updated since 2010 and lists its last meeting as having taken place in November of 2010.
The grand jury should also have recommended a hotline, so that employees could anonymously report misconduct, as well as ethics training and independent ethics advice. They treated this too much as a procurement matter, when it was actually an ethics matter in a procurement context.
It should also have recommended ethics program jurisdiction over contractors, subcontractors, lobbyists, and consultants, so that most of the kind of people involved and knowledgeable about ethical misconduct would be required to take ethics training, and would be expected to seek ethics advice and report ethical misconduct they knew of.
The grand jury also recommended the following:
1. That the Office of Public Safety Director be eliminated, because "is not necessary and only hinders the ability of the Police Chief to properly manage the Police Department in all aspects." It notes that "as a political appointee of the CEO, the position and its functions runs the risk of becoming a repository of 'internal investigations' where cases can be hidden and never see the light of public scrutiny."
2. That the internal auditor be as independent as possible, report to the board of county commissioners, and have no operational role in the government.
3. That county commissioners and procurement personnel be trained to better recognize bid rigging and other illegal procurement practices.
4. Internal controls to properly account for and safeguard government assets. It said something that seems especially wise: "Understanding the vulnerability of physical assets, consequently, will provide a clearer picture of the vulnerability of other assets."
Conclusion
There is a lot in this grand jury report that is worth learning and thinking about. It presents a distressing picture of a government, a large Public Works division, and a huge project that were beset by institutional corruption. Not only were nearly all the essential ethics rules violated and dozens of individuals involved (and many others had knowledge), but very few individuals who knew what was happening reported what they knew. When they did, the investigations were scrapped. If not for one deputy director who went to someone outside the authority of the DWM and county CEO, these schemes would most likely still be going on.
An October 1 report on the grand jury recommendations from the county's chief operating officer made no mention of a full-time ethics officer, according to an article last week in The Crier.
Robert Wechsler
Director of Research-Retired, City Ethics
---
The act that led from the indictment to the grand jury report was the courageous decision of then DWM Deputy Director Jo Ann Macrina to tell the district attorney that the corruption in the DWM went far beyond this one employee. According to the grand jury report, the county police department had, in August 2009, begun an investigation into allegations regarding invoice padding, contract fraud, and bid rigging in the DWM. The investigation, she said, was now being hindered by the police department.
The investigation itself was limited. It focused on contracts between the DWM and a tree service company. The company was believed to have been overbilling the DWM, with the assistance of DWM employees, including a deputy director's brother-in-law, who was employed by multiple DWM contractors.
This might sound like small potatoes, but the first contract was for the sum of $8.8 million. In fact, the entire project, known as the Capital Improvement Program, was to cost $1.35 billion. DeKalb County has a population of about 700,000, and includes Decatur as well as about 10% of the city of Atlanta.
Nepotism, Kickbacks, Overbilling, and a Cover-Up
The tree service company was a small company located outside the state. It was far too small to have considered bidding on the contract on its own. But its owner had met a local businessman through a common friend, and had made a deal to give the businessmn 11% of the company's earnings as a "finder's fee," which he was to share with the brother-in-law who worked for DWM contractors. Such contingency fee contracts are prohibited by law in DeKalb County.
Things get complicated here, but involved individuals with personal and family relationships to a powerful deputy director and his appointee, all of whom became involved in the overbilling scheme. That is, this first piece of the puzzle that came out involved itself covered a wide range of government ethics violations: misuse of office, nepotism, contingency fee contracts, kickbacks, and cronyism.
It's worth noting that, from the beginning, there were questions about the competence of the contractor's work. Not only was there an overexpenditure of government money, but the work done was below expectations, increasing the cost to the community. This is often the case when there are kickback schemes featuring nepotism and cronyism.
It's also worth noting that, when an investigation threatened county officials, there was a cover-up, implicating the police department in addition to the DWM and high-level county officials.
In addition, it turns out that an inspector not only knew about the company's overbilling, but reported it to the two deputy directors involved in the scheme. When told to sign off on the invoices, however, he did so. Had he had a hotline to which to report the overbilling, it's possible that he would have filed a report. If he had been required by law to report the overbilling, it is also more likely that he would have.
Subcontractors
Many ethics codes and procurement rules are limited to contractors, those who are directly responsible to the government. But subcontractors often do all or nearly all of the work. That was the case when the tree service company was told it needed a "black face" to keep the contract. An African-American friend of the company's owner signed the papers, with the plan that the same tree service company would do all the work as a subcontractor.
The other problem here was a lack of verification. The front man had no experience in tree service. His bid would have been rejected if there had been the slightest investigation.
Contract Splitting
Most jurisdictions have an amount below which a contract does not have to be bid. Sometimes, officials collude with contractors to get around competitive bidding via contract splitting, the creation of purchase orders just under the limit (in DeKalb County $50,000) that can add up to no-bid contracts in the millions of dollars. That's what happened in DeKalb County, with 14 different contractors. One of them received $2.6 million over three years, without having to make a bid. It was listed as having only a $50,000 contract.
Outside Approval
Not only did this contract splitting allow contracts to get around the competitive bidding process, but it also ensured that the contracts would not have to be approved by anyone outside the department. In this instance, the contracts would have to be approved by the board of county commissioners. It is better that an independent, centralized office, such as an auditor, inspector general, or ombuds, reviews and approves all contracts, whether bid or not.
Pay-to-Play Hiring and Contingency Fees
Multiple contractors and subcontractors hired a DWM deputy director's twin brother as a consultant, although he had no experience in the field, and they won contracts. After one contractor fired the twin brother, its bids were rejected and work under its current contracts was reduced or ended.
Contingency fee language for the brother's consulting contracts was developed by his sister, then a judge, and a county attorney serving then as the Assistant Director of Purchasing and Contracting. The county's manual entitled "Ethics in Public Purchasing for DeKalb County," making such contingency fees illegal, had been originally submitted to this very county attorney.
Failure to Withdraw from Participation
A DWM deputy director who sat on bid selection committees did not withdraw from participation regarding a $20 million contract her brother-in-law was involved in bidding on. He won the contract, and appears to have been a central figure in, and major beneficiary of, the various schemes outlined in the grand jury report.
According to the report, "one subcontractor ... testified that [the brother-in-law] told [a bidder he worked for] that they had nothing to worry about because [the sister-in-law] would be on the selection committee for the contract award." But subcontractors are rarely brought into a government ethics program, do not feel bound to report such misconduct, and know that nothing will happen to them if they do not.
Local Participation Requirements
This huge project has a 20% Local and Small Business Enterprise (LSBE) participation requirement. What this means is that every large contractor that wants to make a bid has to work with a limited number of local small businesses in the field. This gives these small businesses a great deal of power, which can be misused. And it also encourages the creation of local small businesses that will fit the bill, even if they lack the expertise.
The grand jury, in recommending the elimination or substantial revision of the program, notes that "one common abuse has featured non-LSBE firms who partner with, and sometimes create, sham firms who meet LSBE eligibility criteria on paper but who perform no actual work - or, in the words of LSBE regulations, perform no 'commercially useful function' - on the government-funded project."
For any government wondering how to better control such a program, this report contains some good recommendations.
The County CEO
The county CEO has a great deal of power with respect to DWM operations and especially this big project. The grand jury says that the CEO was involved in the schemes in several ways, and provides details for each:
1. The solicitation of campaign contributions from contractors.
2. The cancellation or attempt to cancel contracts in order to create an "emergency situation." This allows the CEO to enter into a no-bid contract with another contractor.
3. The cancellation of contracts and the non-issuance of work to contractors for punitive and political reasons.
4. The selection of bid selection committee members, despite the fact that major campaign contributors are likely to or have already submitted bids.
5. Ex parte communications with committee members and bidders during the active evaluation period.
6. Interference with and/or alteration of a selection committee's final recommendation, prior to its submission to the Board of Commissioners, in favor of vendors represented by a particular lobbyist or vendors with a history of making and raising large campaign contributions.
Grand Jury Recommendations
The grand jury recommended the indictment of at least twelve individuals. The charges include bid rigging, kickbacks, manipulation of the selection committee process, theft, and perjury.
It also recommended a reorganization of the county government. It points to the "over-reliance on County staff and departments who ultimately report to an elected official," arguing that it "provides too many opportunities for
fraudulent influences and fosters a culture that is overly politicized and in which inappropriate business relationships are created. Inept policies and procedures and an attitude of non-compliance with same has been a strong thread throughout our investigation."
In effect, it recommends a change from mayor-council to council-manager form of government, a change that is, sadly, not the current trend. What people tend to see as the accountability of a single leader often gives that leader too much power.
As part of the change in form of government, the grand jury recommended that the county commissioners be full time, so that they can be better focused on and informed about what goes on in the county government, and also because this "would help to eliminate potential conflicts between their private life and public responsibility."
The grand jury recommended "a comprehensive and enforceable code of ethics." It wrote, "Ethics is of such importance that our recommendation is for DeKalb County to create a full time Ethics Officer position, supported with proper departmental resources, that reports to the Board of Commissioners. The sole purpose of this position and department will be to establish and enforce new ethical guidelines for employees, vendors and elected officials." It recommended using Atlanta's ethics program as a model, but failed to recognize that Atlanta's ethics officer reports to the ethics board, not to the city council.
The grand jury was especially concerned that the members of the ethics board were political appointees (Atlanta's are selected by community organizations, as City Ethics recommends). It also notes that the Board of Ethics website has not been updated since 2010 and lists its last meeting as having taken place in November of 2010.
The grand jury should also have recommended a hotline, so that employees could anonymously report misconduct, as well as ethics training and independent ethics advice. They treated this too much as a procurement matter, when it was actually an ethics matter in a procurement context.
It should also have recommended ethics program jurisdiction over contractors, subcontractors, lobbyists, and consultants, so that most of the kind of people involved and knowledgeable about ethical misconduct would be required to take ethics training, and would be expected to seek ethics advice and report ethical misconduct they knew of.
The grand jury also recommended the following:
1. That the Office of Public Safety Director be eliminated, because "is not necessary and only hinders the ability of the Police Chief to properly manage the Police Department in all aspects." It notes that "as a political appointee of the CEO, the position and its functions runs the risk of becoming a repository of 'internal investigations' where cases can be hidden and never see the light of public scrutiny."
2. That the internal auditor be as independent as possible, report to the board of county commissioners, and have no operational role in the government.
3. That county commissioners and procurement personnel be trained to better recognize bid rigging and other illegal procurement practices.
4. Internal controls to properly account for and safeguard government assets. It said something that seems especially wise: "Understanding the vulnerability of physical assets, consequently, will provide a clearer picture of the vulnerability of other assets."
Conclusion
There is a lot in this grand jury report that is worth learning and thinking about. It presents a distressing picture of a government, a large Public Works division, and a huge project that were beset by institutional corruption. Not only were nearly all the essential ethics rules violated and dozens of individuals involved (and many others had knowledge), but very few individuals who knew what was happening reported what they knew. When they did, the investigations were scrapped. If not for one deputy director who went to someone outside the authority of the DWM and county CEO, these schemes would most likely still be going on.
An October 1 report on the grand jury recommendations from the county's chief operating officer made no mention of a full-time ethics officer, according to an article last week in The Crier.
Robert Wechsler
Director of Research-Retired, City Ethics
---
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