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Blacklisting public contractors as an anti-corruption and racketeering strategy.

In New York City, the struggle against organized crime and the most recent round of corruption scandals have prompted a series of "reforms" aimed at denying public contracts to individuals and firms that are "mob-connected" or otherwise corrupt. While the motivation behind these initiatives is understandable, the initiatives themselves raise complex and difficult issues of governmental ethics, fairness, and efficiency. For example: (1) Should government operating agencies attempt to punish corrupt individuals and organizations by denying them public contracts? (2) Does government have an ethical responsibility to avoid doing business with corrupt contractors? (3) Can blacklisting be implemented fairly and systematically so as not to jeopardize the efficient operation of government?

Background

In August, 1991, the New York City School Construction Authority (SCA)(1) announced that it was blacklisting for up to five years more than fifty construction firms. The policy was shaped by SCA's inspector general, Thomas D. Thacher II, formerly director of the joint Manhattan D.A. and NYS Organized Crime Task Force's strike force on corruption and racketeering in the New York City construction industry. Nearly half the disqualifications were based on purported mob ties or criminality--such as bribery of a union official or inspector, tax fraud, minority business enterprise fraud, and money laundering--not on poor performance on previous government contracts or inability to perform future contracts.(2) The SCA's move is the farthest in a progression of steps by City agencies to sanitize the multi-billion-dollar contracting process of any taint of corruption. It attests to the political strength of anticorruption reforms following the 1980s City corruption scandals,(3) and the growing influence of law enforcement agencies and personnel in all facets of public administration and public policy.

The SCA prequalification procedure for would-be contractors includes a 30-page prequalification questionnaire which, among other things, asks:

In the past ten years has the applicant firm, or any of its current or past key people or affiliate firms .. taken the Fifth Amendment in testimony regarding a business related crime? .. given or offered to give money or any other benefit to a labor official or public servant with intent to influence that labor official or public servant with respect to any of his or her official acts, duties or decisions as a labor official [sic]? ... agreed with another to bid below the market rate?(4)

An applicant can be prosecuted as well as blacklisted for a false answer. Given the pervasiveness of payoffs to labor officials and building inspectors in the New York City construction industry, a large percentage of firms that answer these questions in the negative are making themselves vulnerable to administrative and criminal sanctions.

Agencies subject to the New York City Charter operate under a similar, but somewhat less stringent, regimen. Under new contract procurement rules, each agency's contracting officer and chief administrator must determine whether a contractor or vendor is financially, operationally, and morally responsible. If the agency believes the would-be contractor to be "corrupt," the contract must be denied. Even if the agency finds the contractor to be morally responsible, the City Comptroller has authority to review the agency's judgment and to object to the registration of a contract if it may reasonably be supposed that the contractor or the agency is "corrupt."(5) However, the Charter does not define "moral" or "corrupt," nor does it specify the grounds for the agency's or the Comptroller's objections.

In the last few years, law enforcement agencies and anti-corruption units within city government have been exhorting government agencies to refuse to do business with criminals and racketeers and their companies. For instance, in late October, 1991, City Comptroller Elizabeth Holtzman (former Brooklyn District Attorney) urged Mayor David Dinkins to overrule his Chief Procurement Officer's decision to enter into a contract with a construction firm which had failed to report that it had once been investigated by the Occupational Safety and Health Administration for a workplace safety issue.(6) The Chief Procurement Officer argued that an OSHA investigation is not the kind of (corruption-type) investigation that must be reported. The Mayor ultimately agreed, but not without criticism for being soft on corruption.

During the summer and fall of 1991, the Comptroller sparred with the Department of Correction (DOC) with respect to an emergency jail construction contract that DOC intended to sign with the DeMatteis Construction Company. DOC asserted that the contract did not need to be let by competitive bidding because of the emergency caused by dangerous overcrowding on Rikers Island.(7) The Comptroller disagreed and raised questions about contracting with a company that was under investigation in another jurisdiction and whose officers allegedly had business dealings with the relatives of organized crime figures. DOC counter-charged that the Comptroller was risking a public safety crisis. In January, 1992, Mayor Dinkins canceled the contract and initiated proceedings to debar the company from all City work.(8)

In another example of the stringent integrity tests for government contractors, the City suspended a contract to remove abandoned cars from Brooklyn streets held by a carting company run by Carmine Agnello, John Gotti's son-in-law. According to Comptroller Holtzman, the C & M Agnello Company and its owner "had been implicated in a |chop shop' operation in Queens and [Carmine Agnello] was under investigation for possible jury tampering in an organized crime trial in Brooklyn involving Mr. Gotti's brother Gene."(9) Agnello employees, in protests widely covered by the media, argued that they were engaged in legitimate business, that Mr. Agnello was on the job every day, and that the company's employees were, in effect, being convicted and punished without trial and for alleged offenses unrelated to the public contract they had been performing.(10)

These cases and many others raise fascinating and important questions about governmental ethics, fairness, and efficiency. Everyone can agree that firms which are unqualified to carry out government jobs can and should be denied contracts and, if possible, the right even to bid on such contracts. Likewise, firms which have performed unsatisfactorily on past contracts ought to be "debarred" from future City business unless there is some satisfactory explanation for the past behavior or some convincing reason why future performance is almost certain to be satisfactory. Thus, a strong justification for blacklisting public contractors is protection of the City and its taxpayers from being victimized by firms with a demonstrated record of fraud, shoddy workmanship, and incompetence.

Four different questions are: (1) whether the City and public authorities ought to attempt to deny contracts to morally irresponsible: companies on the ground that government ought not to do business with "corrupt" individuals and firms; (2) whether government agencies and public authorities ought to support law enforcement's war on organized crime and other forms of racketeering and corruption by blacklisting companies controlled or influenced by, or associated with, Cosa Nostra, regardless of whether these companies perform their contracts adequately; (3) whether such a policy is capable of fair implementation; and (4) whether its costs in terms of administrative delay and reduced competition would be worth the advantage of keeping government free of whatever taint comes from a contractual relationship with a morally irresponsible firm.

Is Blacklisting A Sound Crime Control Strategy?

The New York State Organized Crime Task Force's Final Report on Corruption and Racketeering in the New York City Construction Industry (1991) documents the pervasiveness of organized crime in New York City's construction industry since the early 20th century. The City's five organized crime families operate, control, or influence a large number of construction and supply firms; they also dominate a number of important unions. The Final Report applauds the City's efforts to build an information base about the mob ties of construction companies and recommends that debarment be used more liberally to eliminate undesirable companies.(11) The Final Report does not recommend that government agencies deny contracts to contractors who hire workers belonging to mobbed-up unions, perhaps because adoption of that policy would shut down public works altogether.

On its face, the recommendation that government agencies refuse to deal with companies run by racketeers looks uncontroversial. There would seem to be something perverse about government investigators and prosecutors spending millions of dollars to destroy organized crime syndicates and the companies they control while City operating agencies pay millions of dollars to these same companies.

But will blacklisting "work"? Implicit in OCTF's recommendations is the belief that denying public contracts to "mobbed-up" or "mob-influenced" firms will weaken the financial base of organized crime and ultimately its power. Moreover, implicit in the policy of mobilizing government contracting to aid law enforcement is the belief that threatening to deny contractors a significant portion of their business will deter them from dealing with racketeers. However, the assumptions, logic, and practicality of this policy should be carefully examined. It is not easy to eliminate mobbed-up or otherwise immoral companies from government contracting. A blacklisted company may continue to do business with the government under a different corporate identity and through different officers (fronts without criminal records). It is extremely difficult to prove that a new firm is the alter ego of one previously blacklisted. One recent case dealing with fraud that was not mob related involved a chameleon-like vendor of metal working tools, Diversified Products. Rather than blacklist the company, the New York City Comptroller and Corporation Counsel have decided to seek debarment of the individual most closely associated with several contract defaults and bid rigging charges against predecessor companies; the matter has been pending since the summer of 1990.(12) This strategy could also be thwarted if the blacklisted person shifts his or her authority to a "clean" friend or relative. For blacklisting to have any hope of success in the case of a powerful organized crime figure, it would require extensive and expensive investigation and monitoring.(13) Even then, we cannot assume that such a policy will "work."

The argument that legitimate businessmen will be deterred from getting involved with racketeers if their public contracts are at risk assumes that contractors have control over these relationships and that, if properly motivated, they have the capacity to resist the pressures of racketeers. In many case--and the New York City construction market is a good example--contractors have had no real option to refuse to deal with mobsters and racketeers. Failure to cooperate with Cosa Nostra has meant being put out of business by labor unrest or no labor at all as well as by sabotage and violence.(14)

Even if the mob could be purged from certain industries, like construction and waste hauling, does it follow that it would be substantially weakened as an organization or institution? On reflection, the issues are more complex. For example, suppose that, purged from the legitimate economy, Cosa Nostra expanded its operations in drugs, extortion, and other rackets: would society be better off? The answer depends upon whether racketeers perform their construction contracts satisfactorily, the extent and cost of any corruption perpetrated in that performance, and whether the denial of public contracts would significantly weaken organized crime syndicates.

Is Blacklisting Ethically Required or Justifiable?

Is it unethical for a government agency to enter into contracts with "known" or suspected members of organized crime syndicates or with other racketeers? One might argue that government agencies, as repositories not only of the public's trust but of the public's money, must maintain "clean hands" and therefore never knowingly bargain or cooperate with "mobsters," "racketeers," or "criminals." Otherwise, the public's trust in and support for government might be undermined. But this would be an enormous moral and administrative burden for government to shoulder. There are tens of thousands of City contractors, each owned by and employing various numbers of individuals. On what basis could a fiscally strapped City government judge the moral character of all these contractors, and at what cost? Furthermore, what would be the practical implications of limiting contracting only to a subset of all contractors? Fewer services? Higher costs? Less competition? More delay?

It can be argued that in contracting for services or supplies, a government agency is not vouching for the integrity or good character of the consultant, contractor, or vendor. A further argument is that an operating agency's foremost duty is to get satisfactory performance for the best price, no mean feat in itself. In this view, government operating agencies are not responsible for law enforcement or for policing the moral character of the individuals and firms that provide pencils, concrete, painting, or computer systems. Even if government agencies had the time and expertise to investigate and pronounce on the moral character of their contractors, there is the question of what standard should be set for disqualification. It is hardly obvious that the government ought to exclude ex-convicts (much less suspected or acquitted "criminals") from the legitimate economy. But even if it is, in principle, sound ethics not to deal knowingly in any way with morally questionable individuals and firms, is a government operating agency in a good position to investigate the character of the principals, managers, and employees of the tens of thousands of firms with which it does business, much less the suppliers and subcontractors with whom those firms do business? An entire system of norms, rules, and procedures and a larger bureaucracy would be necessary to implement a fair and comprehensive system to judge the moral eligibility of government contractors. Isn't that the kind of exaggerated ambition that will ultimately come back to haunt government agencies as journalists and other observers and critics confront officials with contracts that have been let to all sorts of morally questionable individuals who inevitably will slip through the net?

Whose Influence or Control Disqualifies A Firm From Government Contracting?

Assuming that either for crime control or ethical reasons, government agencies are justified in refusing (indeed, have an affirmative duty to refuse) to deal with morally "tainted" firms, how are such firms to be identified? What relationship between a morally irresponsible individual and a firm serves to so taint that firm that it would be justifiable to blacklist it as a government contractor? The paradigmatic case is one in which a company is operated by a mafia don. In fact, this possibility is hypothetical since crime syndicates specialize in selling connections and protection to criminals and non-criminals, not in managing companies.(15) "Mobbed-up" companies are typically operated by organized crime associates who are themselves not "made members" of organized crime.(16) It is not uncommon, of course, for organized crime figures to establish themselves as partners (silent or of record) or investors in a firm. Whatever the legal arrangement, they exercise little control over day-to-day operations but take a percentage of the profits.

It would be no easy matter to specify the point at which organized crime's connection with or investment in a firm so taints it as to require or justify disqualifying it from public contracting. For instance, in the controversy over the emergency jail construction contract with DeMatteis Construction, the Comptroller (opposing the contract) argued that federal and New Jersey officials had evidence that the company's president owned a majority interest in a concrete company that was operated by the son-in-law of former Gambino Crime Family boss Paul Castellano. If this kind of association is enough to blacklist a firm, it means that the relatives and in-laws of reputed organized crime figures have become pariahs, barred from fully participating in the legitimate economy. The suspension of the carting and towing contracts of John Gotti's son-in-law, Carmine Agnello, is a recent example.

If only mid- or lower-level employees of a firm are linked to organized crime, would that justify blacklisting the firm? How many (or what percent of) Cosa Nostra members, associates, relatives, or friends are enough to justify blacklisting? The only public agency in New York City that has developed written criteria to deal with these questions is the School Construction Authority. Its rules provide for disqualification of contractors on the following grounds: 1. For a criminal conviction within the past five years of the applicant, or its current or past officers or principals, indicating unfair or unethical business practices or moral turpitude, the applicant will be barred from doing work for the Authority for a period of five years from the date of conviction. 2. In case of a pending criminal investigation of an applicant or its officer(s) or principal(s) or its affiliated companies, the applicant will be precluded from doing work for the Authority during the pendency of the investigation. 3. In the event that the applicant, or any of its officer(s) or principal(s) or its affiliated companies, are under indictment, the applicant will be precluded from doing work for the Authority. 4. A material false statement or omission made in response to any question in the prequalification application will result in debarment of the applicant for a period of three years from the date of filing of the application. 5. If the applicant's lack of integrity and ethics arises from circumstances other than the ones noted [above], the Authority will evaluate the facts and circumstances on a case-by-case basis and debar an applicant up to five years.(17)

These criteria are broad enough (especially #5) to give SCA officials authority to blacklist practically any company that they believe to be criminal, immoral, unethical, or tainted by organized crime connections.(18)

Interestingly enough, the rationale for these blacklisting criteria is not stated. Perhaps #1 (previous conviction) is predicated on the belief that a company convicted of unfair or unethical business practices poses a significant risk of future wrongdoing on government contracts. Ought there to be such a strong presumption of future wrongdoing? Major American corporations like Westinghouse and General Electric have been convicted of crimes involving unethical business practices and are still allowed to bid on government contracts.(19) Should Stanford University's misuse of government grants or MIT's price fixing on financial aid disqualify them from all government contracting? Perhaps the circumstances in the New York City construction industry are different, and its wayward firms less likely to rehabilitate themselves. We are not arguing that SCA's policy is wrong, merely that it raises many and complex questions that ought not to go unexamined, especially inasmuch as similar (albeit less well-formulated) policies are seemingly being adopted all around City government.

What Counts As "Organized Crime"?

Is it only Cosa Nostra tainted firms that should be disqualified from government contracts? What about firms whose officers are members of other crime groups or are simply corrupt individuals, unaffiliated with a syndicate, group, or gang? Devotees of scholarship on organized crime will recognize that we have bumped up against the intractable problem of defining organized crime. Lawmakers and law enforcement officials have long been uncomfortable defining organized crime by reference to Italian-American crime syndicates.(20) Principled blacklisting policy would have to apply to firms whose principals are members or associates of any crime syndicate or crime group, and perhaps to non-syndicate criminals or racketeers as well.

What Constitutes Proof of Being a Mobster?

One possibility is to say that anyone who has been convicted in an organized crime case is a member or associate of organized crime, and that his relationship to a firm disqualifies it from public contracting. This would first require agreement on what is an "organized crime case." In any event, only a small number of organized crime figures are convicted, and they typically get long prison terms that separate them from the companies they tainted. Should the firms with which they were previously associated be blacklisted?

In many cases involving blacklisting issues, the criminal associations of certain individuals will be alleged, reputed, or suspected. Putting aside the question of some sort of statute of limitations (for example, a ten-year-old conviction), what inferences should be drawn from an indictment, "pending investigation," or agency belief or suspicion?

We also need to ask whether all criminality justifies blacklisting. Only "organized crimes"? Crimes related to bid rigging and contract fraud? Given pervasive labor racketeering in the New York City construction industry, should conviction for making payoffs to corrupt labor officials disqualify a construction company from future government contracts?

The recent dispute over the letting of a City jail construction contract to DeMatteis Construction is again illustrative. Comptroller Elizabeth Holtzman based her opposition to the contract on the grounds that

[T]he chief executive of this company is or was also the owner of another company which is currently the target of a civil anti-trust action that alleges involvement in a bid rigging scheme for concrete supply [and that] a recently issued federal appellate court opinion contains information suggesting that federal prosecutors believe that the executive may have perjured himself when he appeared before a grand jury investigating allegations against the alleged Genovese crime family.(21)

In other words, blacklisting of company A was predicated on (1) company A's CEO's ownership of company B, a defendant in a civil anti-trust case, and (2) a prosecutor's belief that company A's CEO may have committed perjury before a grand jury investigating an organized crime family. None of the parties--the Department of Corrections, the Department of General Services, the Mayor's Office, or the Comptroller--contended that DeMatteis was incapable of completing the job on time and to specifications; nor did the dispute involve an allegation that DeMatteis's president was a member of an organized crime family.

Casting the net still wider, government agencies might seek to blacklist firms run by or employing organized crime "associates." Classifying someone as an organized crime "associate" is sensible for law enforcement investigators whose job is to sniff out criminal cabals, but it is a rather vague status on which to ground public contracting policy. Who counts as an "organized crime associate" (even assuming a satisfactory definition of organized crime)? A relative of a "known" organized crime figure? How close a relative? A friend? How close a friend? A person who, in other contexts, has business dealings with an organized crime figure? A person who pays off (extortion? bribery? tribute? fees for services?) organized crime figures? Law enforcement agencies do not have to worry about these problems, but a public contracting blacklisting policy will have to struggle with them to avoid becoming hopelessly arbitrary and capricious.

How Much Mob Control Does It Take To Taint a Firm?

Obviously, a construction company whose chief executive officer is a Mafia don could properly be defined as mob-controlled, although it is a closer question whether the firm should necessarily continue to be defined as mob-controlled after the don has been sent to prison for life. In the real world, Mafia dons do not function as CEOs. More likely, law enforcement agencies point to organized crime members and associates who hold (often no-show) jobs with particular companies. For example, reputed Gambino Crime Family boss John Gotti was allegedly employed by ARC Plumbing as a salesman.(22) Should employing a member or associate of organized crime as a salesman or consultant disqualify a firm from public contracting? This would be a harsh policy in light of Cosa Nostra's ability to coerce firms to put them and their members and friends on construction company payrolls.

The problem becomes even more complex when we consider labor racketeering. The Organized Crime Task Force identified fifteen New York City construction unions as controlled or strongly influenced by organized crime; these unions include Local 282 of the International Brotherhood of Teamsters, Local 6A of the Cement and Concrete Workers, Local 95 of the Housewreckers Union, and the New York City and Vicinity District Council of the Carpenters Union.(23) In effect, these powerful unions determine whether a contracting firm can do business at all in New York City because they can shut down a project by withholding labor, causing labor strife or blocking the delivery of supplies. The result is that construction firms have no choice but to pay off mob-connected labor officials in cash, no-show jobs, or other creative ways. Thus, all major construction projects in New York City might be labelled "tainted" by the fact that the companies performing them are engaged in collective bargaining arrangements with Cosa Nostra-controlled or influenced unions or make payoffs to organized crime members or associates who are officers of these unions. Should all companies employing workers who are members of "mobbed up" unions therefore be disqualified from public contracting? Should City agencies and public authorities themselves shun collective bargaining agreements with mobbed-up unions and sever the agreements with unions whose officials have been convicted of racketeering?(24) The principle that government must not deal with racketeers and corrupt individuals will turn out to be very difficult to contain.

How to Decide: The VENDEX Data Base

If government operating agencies have to operate under the injunction not to deal with "mobbed-up" firms, how will they determine whether a firm falls into this category? Ironically, law enforcement agencies which are pressing to enlist and mobilize the support of all public sector agencies in the war on organized crime have been notoriously unwilling to share information, especially on pending investigations. Moreover, they are legally barred from divulging information obtained from grand jury testimony.

Several years ago the City set out to create a data base, called VENDEX, into which all public record information on corrupt and racketeer-dominated firms would be entered and to which all agencies would have access. While VENDEX is now up and running, it is not nearly as comprehensive as its architects envisioned.(25) The original idea was to include data bearing on the future performance and integrity of contractors (for example, those contractors who had defaulted on a previous public contract.). As it now operates, the only information consistently entered into the system is whether a company has been either debarred from all City contracts or found "not responsible" by one or more agencies for fraud (in bidding, performance, or certification as a minority business enterprise) or declared a poor performer; however, very few companies have either been formally debarred or found not responsible. Thus, up until recently, VENDEX has not been much help in assessing the integrity of contractors.

The Mayor's Office of Contracts has centralized the determination of VENDEX "cautions"; that is, the Office decides whether a contractor's prior behavior merits a warning to City contracting agencies. However, Local Law 5 specifies additional sources of cautions, including findings and debarments by "other governments" and "information from public reports of ... the New York State Organized Crime Task Force which indicates [contractor] involvement in criminal activity." Beginning in January, 1992, the Comptroller and the Mayor's Office of Contracts became co-administrators of VENDEX. The Comptroller's staff is committed to expanding the criteria for entering cautions. This means that a wider variety of allegations, investigations, and "suspicious" business relationships will be entered into the data base.

VENDEX is only as reliable as the information in its data base, and there is reason to believe that erroneous integrity cautions have been entered in the past. In several cases that we are aware of, names of companies have been entered into VENDEX by clerical personnel simply because they appeared in an investigation file. Such entries are made without any analysis of context much less any application of formal criteria defining "morally irresponsible" or "corrupt." Once a caution is entered into VENDEX, a contractor is suspect and may be declared irresponsible without any agency explanation. At the very least, a VENDEX caution will delay the letting of a contract to a low bidder pending further investigation.

In addition to scanning VENDEX for indications of criminality and moral irresponsibility, agency contracting personnel routinely seek information from the Department of Investigation (DOI) and the agency's inspector general, who also works for DOI. The inspector general checks the target company's VENDEX questionnaire responses and DOI files for any prior convictions, investigations, or statements that might be false.(26)

Ultimately, agency officials must decide whether there are too many doubts about integrity. But such decisions are made in a political environment. If the agency head gives the contractor the benefit of the doubt, she risks being blasted by the media, Comptroller, law enforcement officials, and politicians for dealing with crooks, mobsters, and corrupt businessmen. One can understand risk-averse agency officials deciding that the safer course is to disqualify a would-be contractor if there is any entry in VENDEX or anything negative in the DOI files. This could lead to more delay and to fewer contracts being let.

Should the Disqualification Decision Be Made on an Agency-by-Agency Basis or by a City-Wide Integrity Board?

If government agencies are justified, or have an affirmative duty, not to contract with criminally tainted firms, should a decision by one City agency that a firm is criminally tainted be dispositive for all other agencies? On the one hand, why should one agency's determination that company X is morally irresponsible even presumptively bind every other agency? On the other hand, wouldn't it be wasteful, expensive, and time-consuming for every agency to carry out its own independent inquiry and evaluation of company X's moral responsibility? Moreover, what commissioner would want to take the political risk of letting a contract to a company that another agency had blacklisted for being morally irresponsible?(27)

Ultimately, if the current drive to blacklist corrupt contractors continues, it seems inevitable that the City will assign a single mega-agency responsibility for a City-wide determination of moral responsibility. Given tens of thousands of City contractors, that agency will face a daunting challenge which could threaten to delay further the City's tortuously slow contracting system. And we have not yet considered the status of subcontractors. All the effort to keep the government from contracting with corrupt and immoral firms could be defeated or at least severely undermined if "clean" firms are free to subcontract their jobs to morally irresponsible firms. A truly comprehensive effort to keep City agencies from doing business with crooks would require scrutiny of subcontractors!

What Process is Due a Disqualified Firm?

When an agency makes a determination that a firm is not moral enough to be a public contractor, should that firm be entitled to challenge the agency's determination at a hearing? Even though it has long been held that there is no right to public contracts,(28) New York City has provided due process in responsibility and debarment determinations.(29) Basic fairness would seem to require that where the City seeks to blacklist a firm on grounds of moral irresponsibility, there should be an opportunity to confront and rebut the charges before the agency or an independent administrative board. Currently, a blacklisted firm has no such opportunity.

Administrative appeal of non-responsibility findings, first to the agency head and then to the Mayor, and judicial appeals that may follow are weighted against the contractor in several ways. While the appeal is pending, the agency can award the contract to the next lowest bidder because of a "substantial city interest" in getting public contracts let and projects completed. Should administrative appeals fail, a contractor can take the City to court. However, there is little economic incentive to do so because damages in such cases do not include profits foregone, but only expenses incurred in preparing the bid. One contractor who had been debarred from all City business for five years did win his appeal, but it took the courts four-and-a-half years to decide that his company had been wrongly debarred. There are good reasons for not holding up City contracts while legal disputes over disqualification or debarment are being decided, but this also means that decisions to disqualify and debar should be made cautiously on the basis of clear agency substantive and procedural guidelines that are subject to examination and comment.

The Costs of Good Intentions

Preventing government agencies from entering into contracts with morally irresponsible persons and firms entails considerable costs. Direct costs include conducting investigations, maintaining data bases, and implementing due process procedures. Indirect costs include delay in bidding and executing public contracts and the higher prices that result from reducing the number of eligible bidders on public works.

There are no systematic cost figures on the blacklisting process, but the SCA has generated some rough estimates. SCA has an inspectional staff of fifty (plus fifteen personnel from the DA's office) and a budget of $3 million per year. Investigating a typical applicant costs approximately $2,000; a complex case can reach $10,000.(30)

One example of the kind of indirect costs that may be generated by a strict policy of refusing to do business with morally irresponsible companies is illustrated by New York City's experience with road surfacing in the Bronx and Queens in 1987. The low bidders on each of the contracts had affiliations with Lizza Industries, which had previously been convicted on state racketeering charges and bid rigging. The City Department of Transportation sought a Board of Responsibility hearing to have the contractors declared not responsible for reasons of integrity. Both low bidders withdrew before the hearings were held. The second lowest bidder for the Queens contract had also recently been convicted of bid rigging. The third lowest bidder also withdrew in advance of a hearing. A similar situation eliminated the next lowest bidder for the Bronx contract. After another round of bids, the contracts were awarded to a company that turned around and purchased much of the asphalt for the job from the two original low bidders, thus making a mockery of the whole effort while adding many costs resulting from a year's delay.(31)

Another example of how difficult it is to implement blacklisting of morally irresponsible contractors is the New York State Department of Transportation's (DOT) refusal in 1984 to do business with any of the major asphalt supply firms on Long Island after DOT officials found that bids for jobs on Long Island were consistently 30 percent or more above the DOT engineer's estimates because of payments to labor racketeers, intimidation of competitors, and bid rigging. Because of DOT's position, there was little road building or road reconstruction on Long Island for several years. After several attempts to attract more bidders produced only one bid, and that from a Cosa Nostra-connected New York City firm, the State caved in and accepted bids from the original bidders! The ultimate price tag on the job was significantly higher than the original price, and motorists had endured pot holes for several years.

These examples do not mean that it is wrong to refuse to deal with companies that have a track record of defrauding the City by bid rigging, overcharging, and underperforming. On the contrary, we believe this is a justifiable rationale for blacklisting. However, these examples illustrate a more controversial policy: refusing to do business with corrupt firms and individuals.

Alternative Anti-Corruption Strategies

Our purpose has been to expose to public scrutiny and debate the emergence of a policy of blacklisting public contractors to further law enforcement goals or to ensure that New York City will contract only with morally responsible persons and companies. Yet thorny problems concerning rationale, implementation, feasibility, fairness and costs remain. It might be wise to stop here. However, we wish to go one step further, suggesting that blacklisting is not the only anti-corruption strategy that can protect the city from being victimized by bid rigging and performance frauds. A comprehensive assessment of blacklisting ought to take into consideration the availability of alternative strategies towards the same end.

Obviously, if government is committed to keeping morally pure in its contractual relationships, there is no alternative to disqualifying contractors who flunk an integrity test. Although blacklisting is not essential to law enforcement's anti-mob attack, it does significantly enhance the law enforcement arsenal, and there is no real substitute for it.

We have argued that the only justifiable rationale for blacklisting is to protect the government from fraud and other victimizations perpetrated by contractors. There are other means to this end. A substantial and impressive body of research and commentary on public contracting advocates "professionalized procurement management" as an anti-corruption strategy. The argument made by procurement professionals and by two recent commissions is that contract and payment supervision and auditing can be made thorough enough to ensure honest contract compliance no matter what the moral proclivities of contractors and vendors.(32) Contrariwise, an incompetent and shoddy system of contract supervision invites fraud, waste, and abuse even from contractors who are basically honest. One way to begin would be to upgrade the status and training of agency chief contract officers (ACCOs). The findings of the New York State Commission on Government Integrity and an earlier study of contracting by the Institute of Public Administration (IPA) link professionalism and corruption prevention.

The City must devote serious attention and resources to training its contracting staff. Over and over again, witnesses at our October 1989 hearings testified that there is an urgent need to upgrade the skills of City contracting personnel who, compared with their peers in other major cities, lack exposure to modern government contracting practices. Although professionalism "is the key to both improving the quality of [the City's contracting] performance and minimizing opportunities for corruption," the IPA found that the City suffers from a "crisis-level" shortage of technically skilled contracting officers" and that "professionalism in contract management is inadequate at all levels of government.". . . Indeed, the lack of competition for city business can be partly attributed to the inexperience of some city contracting staff, who are often ill-equipped to attract new vendors to the City [emphasis added].(33)

Currently, none of the dozens of ACCOs in New York City government has professional procurement certification. Arguably, competent and sophisticated contract supervision from bid through performance to final payment could protect the City and taxpayers from being defrauded.

Admittedly, it is hard to be optimistic about the adoption of professional procurement practices. It would require at least the "development of formal training programs by (and for) the ACCO, and professional procurement organization certifications and affiliation."(34) While these improvements are being considered by the City Council, they require a substantial investment in personnel in a time of fiscal crisis. Moreover, scandals that are likely to occur while such reform is being undertaken will push politicians toward promising quick and dramatic "fixes." Revelations that mobsters, crooks, and their relatives hold City contracts will likely convince more public officials that the imperatives of anti-corruption politics in the 1990s require supporting the "toughest" anti-corruption positions. In an environment charged with anxiety about corruption charges, it is good politics to declare "NO PUBLIC MONEY FOR CORRUPT BUSINESSES."(35) The problem is that this "hard-line" may not significantly reduce corruption and may add significant costs and delays to an already over-burdened and muscle-bound contracting system.

Conclusion

The three reasons for contractor blacklisting--crime control, clean government, and efficient contracting--are not easily balanced. The goal of using blacklisting to protect the government from being victimized in the future is sensible and ought to be pursued. Companies that have in the past defrauded the City or that have grossly failed to carry through on their contracts ought not to be awarded new contracts.

Even if crime control arguably is the responsibility of all government agencies, public agencies and their administrators, having neither the resources nor the training of law enforcement professionals, are ill-suited to fighting Cosa Nostra efficiently or effectively. Cosa Nostra has enormous power and resources to resist blacklisting. Moreover, there are many conceptual and practical difficulties in determining the degree and significance of racketeer connections to legitimate businesses.

The requirement that governmental ethics extend even to the governments choice of contractors is even more ambitious. If it means that the government should not engage in any business dealings with individuals or firms that have ever been convicted, indicted, or suspected of criminality, carrying out public works and various other services will be very difficult. Our analysis suggests that character concerns per se, unrelated to fraud or failure on previous contracts, ought not to disqualify an individual or firm from doing business with the public sector.

The drive to rid contracting of corrupt influences is similar to other contemporary morality movements such as the war on drugs. The overreach of various drug war strategies is said to be the price that must be paid for a drug-free society. Likewise, the goal of a corruption-free City, which avoids every appearance of corruption, even being involved in business relationships with morally irresponsible persons, would require a war on corruption, the costly investigation and monitoring of thousands of contractors and vendors, and the blacklisting of an indeterminable number, depending upon the breadth of the blacklisting criteria and the vigor of the government's investigative effort. The whole enterprise bristles with questions of fairness and practicality. Perhaps even more importantly, if the drive to prevent corruption, and even the appearance of corruption, in public contracting is not carefully thought through, it could actually make the implementation of public works more difficult and more costly.

NOTES

The authors are grateful to Graham Hughes for suggestions and to Stacey Kinnamon for research assistance. They are also grateful to the NYU School of Law for support that made possible the research upon which the article is based. (1) The New York City School Construction Authority was created by the New York State Legislature in 1989 in response to decades of corruption and paralysis in the New York City Board of Education's building program. The Authority is funded by the City and State of New York but is governed by independent trustees appointed by the Mayor and the Governor. See Thacher, Institutional Innovation in Controlling Organized Crime, in Organized Crime and Its Containment: A Transatlantic Initiative 169-82 (C. Fijnaut & J. Jacobs eds. 1991). (2) In response, Francis K. McArdle, Managing Director of the New York City General Contractors Association, warned against arbitrary action by contracting agencies and called for the creation of an appeals board to protect contractors from the use of "subjective reasons" in the exclusion of bidders. Raab, 52 Companies Banned from School Construction Bids, N. Y. Times, Aug. 27, 1991, at B-1. (3) J. Newfield & W. Barrett, City for Sale: Ed Koch and the Betrayal of New York (1988). (4) N.Y. State School Construction Authority, Prequalification Application: Construction Contractors 26, 29 (Nov. 1990). (5) N.Y.C. Charter [subsection] 328(c): "The comptroller may, within thirty days of the date of filing of [a] contract with the comptroller's office, object in writing to the registration of the contract, if in the comptroller's judgment there is sufficient reason to believe that there is possible corruption in the letting of the contract or that the proposed contractor is involved in corrupt activity." For a comprehensive view of the Comptroller's policies, see City of New York, Office of the Comptroller, No More Business as Usual: Keeping City Contracts out of the Hands of Dishonest Contractors (Sept. 1992). (6) Letter from Comptroller Elizabeth Holtzman to Mayor David Dinkins, "R: Contract Nos. 9121992 and 9122457 between EMD Construction Corporation and HPD," (Oct. 28, 1991). (7) The controversy over the emergency jail construction contract is documented in an internal Comptroller's Office Memorandum from David Eichenthal, Counsel for Special Projects and Elizabeth Lang, Special Counsel for Investigations to Comptroller Elizabeth Holtzman, "Re: Contract Award to Leon DeMatteis Construction," (Aug. 23, 1991). (8) Raab, New York Cancels Builder's Contract, Citing Reports on Mob Ties, N. Y. Times, Dec. 26, 1991, at B11. In October, 1992, DeMatteis Construction won a judgment against the City "to the extent of declaring the Mayor's upholding of the Comptroller's objections arbitrary and capricious and vacating that decision as well as the direction that debarment proceedings be commenced." DeMatteis v. Dinkins, Index No. 7500/92 (N.Y. Sup. Ct. Oct. 7,1992). (9) Raab, New York Halts Contract With Gotti Son-in-Law, N. Y. Times, Nov. 19, 1991, at. B1. (10) Another contractor, Hi-Tech Mechanical, allegedly funneled profits from city work to a mob associate. The New York City Housing Authority has announced that it will seek to recover all $9.6 million that Hi-Tech received as payment for completed construction work over a period of years. See Housing Agency Contractor Named in Fraud Indictment, N. Y. Times, Feb. 28, 1992, at B3. (11) N.Y. State Organized Crime Task Force, Corruption and Racketeering in the New York City Construction Industry 259 (1991)[hereinafter cited as Corruption and Racketeering]. (12) Letter from Comptroller Elizabeth Holtzman to Mayor David Dinkins, August 31, 1990, recommending consideration of "whether the corporation, its named principals, and its apparent real parties in interest .... should be barred from doing business with the City of New York." (13) Recognizing the problem of using debarment in many cases, an alternate approach has been suggested by the Organized Crime Task Force and implemented by the SCA. A "problem" contractor agrees to hire an independent investigating firm: (1) to design a code of ethics for the contractor; (2) to implement a corruption prevention program; and (3) to audit the contractor's compliance with the code and program. See Office of Inspector General, N.Y.C School Construction Authority, Press Release, July 29, 1991. Although paid by the firm he or she is to oversee, the independent auditor is responsible for detecting and reporting to public authorities any waste, fraud, or abuse within or perpetrated by the firm. (14) Meyer S. Frucher, former President of the Battery Park City Authority, was able to save several million dollars in construction costs by using a labor consultant who persuaded the teamsters on the job to forego their usual gateway charges on non-union haulers. It turned out later that the labor consultant had been implicated in, but cleared of, charges related to a gangland murder. Frucher's achievement in completing the project and raising money through the Authority for low-income housing elsewhere was impugned by a report of the State Investigation Commission because of his use of the labor consultant. The effect of such criticism may be to deter public entrepreneurship like Frucher's. see State of New York Commission of Investigation, Investigation of the Building and Construction Industry: Report of Conclusions and Recommendations 27-38 (1986). (15) See Gambetta, Fragments of an Economic Theory of the Mafia, 29 Archives Europeenes de Sociologie 127-45 (1988); Schelling, Appendix D--Economic Analysis and Organized Crime, Task Force Report on Organized Crime, President's Commission on Crime and the Administration of Justice (1967). (16) For example, Corruption and Racketeering, supra note 11, found that several concrete and dry wall contractors fell into this associate category. (17) New York City School Construction Authority, Contract Administration: Procedure No. CA-1(1991). (18) Another agency conducting thorough review of the moral character of private parties is the New Jersey Casino Control Commission, which is empowered to require Casino license applicants to provide .. such information, documentation and assurances as may be required to establish by clear and convincing evidence that applicant's good character, honesty and integrity. Such information shall include, without limitation, information pertaining to family, habits, character, reputation, criminal and arrest record, business activities, financial affairs, and business, professional and personal associates, covering at least the 10-year period immediately preceding the filing of the applications. N. J. STAT. ANN. [subsection] 5:12-84. (19) See Schmitt, Guilty Plea by Unisys Is Expected: Military Contractor Would Admit Fraud and Pay $190 Million, N. Y. Times, Sept. 6,1991, C-1; and Duffy and Glastris, The Enemy Within, U.S. News & World Report, July 4, 1988, at 16. (20) Letter from Comptroller Elizabeth Holtzman to Correction Commissioner Allyn R. Sielaff, July 9, 1991. (21) See National Advisory Committee on Criminal Justice Standards and Goals, Report of the Task Force on Organized Crime 10 (1976):

Law enforcement officers stress that organized crime is not limited to La Cosa Nostra or Italian-surnamed individuals, although they say that in some areas where La Cosa Nostra does function, it creates a more complex problem than do other criminal organizations.... The issue of ethnic succession is one that needs immediate study in order to understand the implications for future crime prevention and control work. (22) Corruption and Racketeering, supra note 11, at 85. 23 Id. at 79-82. (24) For example, more than a thousand city employees are members of locals that are part of the New York City and Vicinity District Council of the Carpenters Union. The Council is cited by the New York State Organized Crime Task Force as a union with ties to organized crime. Id. at 80. (25) A description of VENDEX (Vendor Information Exchange System) is set out in City of New York, Mayor's Office of Contracts, Vendex: Policies and Procedure, March 1990. (26) Id. at 30. Vendex embodies the tension in regulating public contracting. On the one hand, it is intended to make contracting more efficient and effective by identifying poor performers and expanding information on contractors and vendors who may be asked to bid on subsequent jobs. On the other hand, it is intended to override effectiveness and efficiency considerations when doubts ("cautions") about integrity arise. (27) See Raab, Contractor, Barred by One Agency, Works for Another, N.Y. Times, Sept. 7, 1991, at 25. In the DeMatteis case, for example, the SCA found no basis for excluding DeMatteis Construction from school construction contracts. (28) "The mere fact that a party who has made proposals for public work in the city of New York is the lowest bidder and knows that fact, does not necessarily entitle him to the contract and does not constitute an award to him of such contract within the meaning of the law regulating the letting of work upon competitive bids .... The commissioner may reject all the bids and readvertise the work, if in his judgement and discretion such course is for the best interest of the municipality." Erving v. Mayor of N.Y., 131 N.Y. 133, 29 N.E. 1101. (29) See New York City Charter [subsection] 335 (b) (1) (1990). "Upon the petition of the head of an agency, after reasonable notice and reasonable opportunity for the person or firm to respond at a hearing to be held on a record, the office of administrative trials and hearings shall determine whether a person or firm should be debarred for cause from consideration for award of any city contract for a period not to exceed five years." (30) Interviews with, Joseph DeLuca, Assistant Inspector General, New York City School Construction Authority (September 25, 1991, and November 18, 1991). Investigation costs are adapted from private sector estimates. (31) See Raab, Asphalt Inquiry Delays Queens and Bronx Road Work, N. Y. Times, April 18, 1987, at 21, 24. "City officials] said the contracts have not been awarded because investigators uncovered possible financial ties between the two companies and a construction company that has been convicted of bid rigging...

"A number of questions have arisen about the backgrounds of these companies, and we are not sure they are responsible bidders,' Mr. [Hadley] Gold, the General Services Commissioner, said, referring to jet and Mt. Hope. 'The questions,' he added, 'concern the corporate entities or relationships with other companies." (32) For example, in place of the seldom used "poor performer" label, effectiveness and efficiency might be emphasized by a gradated rating of contractors on a number of performance measures that would be entered in VENDEX. However, such ratings are only useful if done by trained professional inspectors and procurement officers. (33) New York State Commission on Government integrity, A Ship Without a Captain: The Contracting Process in New York City, in Government Ethics Reform for the 1990s: The Collected Reports of the New York State Commission on Government Integrity 487 (B. Green ed. 1991). See also: Institute of Public Administration, Contracting in New York City Government, Final Report and Recommendations (Nov. 1987). (34) City of New York, Office of the Comptroller, Bureau of Audit, Survey of the Qualifications of New York City Agency Chief Contracting Officers (Jan. 17, 1992). (35) See: Manning The Purity Potlach: An Essay on Conflicts of Interest, American Government, and Moral Escalation, 24 Federal Bar Journal 239-56 (1964).

James B. Jacobs, author of, Drunk Driving: An American Dilemma (1989), is Professor of Law and Director, Center for Research in Crime and Justice, New York University School of Law. Frank Anechiarico is Professor of Government, Hamilton College, Clinton, NY.
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Author:Jacobs, James B.; Anechiarico, Frank
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Date:Jun 22, 1992
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