Firewalls and Indirect Financial Interests

Updates: November 28, 2009 (see below, with December 23 correction)

When a local government official co-owns a company, is it enough to create a separate company owned solely by another co-owner to do business with the official's city?

According to an article in the Baton Rouge Advocate, this has become an issue in Lofourche Parish. The parish sheriff co-owns an ignition interlock device sales company. The device, which prevents drunken people from starting their cars, is required to be used by certain people who have DWI charges against them. The sheriff insists that the company he co-owns does not "provide the services to any resident of Lafourche Parish nor anyone arrested or convicted in the parish" and that he receives nothing of economic value from sales in Lafourche Parish.

But here's how it works. When you're ordered to get a device, you ask where you can get it. The deputy at the jail tells you to go to the Chevrolet dealer or the co-owner's company. You go to the Chevy dealer, who doesn't sell them (the sheriff's company has an exclusive distribution agreement), and the Chevy dealer gives you a number to call:  the sheriff's cellphone number. Also, the sheriff is responsible for arresting people who do not comply with the obligation to use a device.

The real question here is, Does it matter, for the purposes of government ethics, whether the official is benefiting or whether his partner is benefiting? Is there a conflict when an official's business associate benefits from government actions? The official does not have a direct financial interest, but instead a personal or indirect financial interest, that is, an interest in financially benefiting one's family or business associates. Such personal or indirect financial interests are not always included in ethics code definitions of conflicts of interest, but I believe they should be. See the City Ethics Model Code conflicts provision and the Model Code definition of "personal interest."

This issue more commonly comes up with respect to law firms. An official creates a "firewall," which separates him from any knowledge of what his partners are doing in a case relating to the city or county. The official says he also gets no financial benefit from the case.

One, this assumes that benefiting one's partners does not involve an interest that could create a conflict with the official's government obligations. And two, it assumes that partners, whether selling devices or legal services, divvy up the money in such a way that they actually take into account the partner's conflict. This would be next to impossible to prove, especially in a law firm, where partnership shares are fluid. How can anyone know that the official isn't being compensated from the conflicting activities?

Firewalls might work with a stock portfolio (although there are problems there as well), but with sales and services by partners I don't think a firewall makes a difference. It certainly shows an attempt to keep things above board, but it misses the point that benefiting one's business associates is itself a problem.

Update: November 28, 2009
According to an article in the Lafourche Parish Daily Comet, the Lousiana Ethics Adjudicatory Board unanimously dismissed the allegations against the sheriff, "ruling he did not use his office to make money selling devices designed to keep drunken drivers off the road." Without an indirect interest language, the matter boiled down to misuse of office, and this could not be proven.

I can now share with you the decision of the Ethics Adjudicatory Board, the board of administrative law judges created in 2008 to replace the state ethics board, which now acts only as investigator and prosecutor. It can be found here.

According to an article earlier this month in the New Orleans Times-Picayune, the state ethics board is trying to do what it can to get the Louisiana State Law Institute to take a look at the new law. The nonpartisan Public Affairs Research Council of Louisiana agrees. But the Institute says it won't do it unless the legislature asks for help, which doesn't seem likely.

Robert Wechsler
Director of Research-Retired, City Ethics

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