In August 2009, after a month of testimony in a federal court, a jury found former Congressman William J. Jefferson guilty on 11 charged counts, including solicitation of bribes, honest services wire fraud, money laundering, racketeering, and conspiracy.
“We have been reminded today that we are a nation of laws, and not men,” said Dana J. Boente, U.S. Attorney for the Eastern District of Virginia. “It should be a clear signal that no public official – and certainly not a U.S. Congressman – can put their office up for sale and betray that office. It cannot be tolerated. It cannot just be another cost of doing business. And today, a jury of his peers held Congressman Jefferson accountable for his actions.”
“Trust and integrity in public officials is at the heart of our democracy,” said Joseph Persichini Jr., Assistant Director of the Washington Field Office of the FBI. “What a better way to ensure those virtues, than to expose those who breach that trust.”
According to evidence at trial, from August 2000 to August 2005 Jefferson used his position as an elected member of the U.S. House of Representatives to corruptly seek, solicit and direct that things of value be paid to himself and his family members in exchange for his performance of official acts to advance the interests of people and businesses who offered him the bribes. The things of value, according to evidence at trial, included hundreds of thousands of dollars worth of bribes in the form of payments from monthly fees or retainers, consulting fees, percentage shares of revenues and profits, flat fees for items sold, and stock ownership in the companies seeking his official assistance.
Evidence at trial showed that Jefferson performed a wide range of official acts in return for things of value, including leading official business delegations to Africa, corresponding with U.S. and foreign government officials, and utilizing congressional staff members to promote businesses and businesspersons. The business ventures that Jefferson sought to promote included telecommunications deals in Nigeria, Ghana, and elsewhere; oil concessions in Equatorial Guinea; satellite transmission contracts in Botswana, Equatorial Guinea and the Republic of Congo; and development of different plants and facilities in Nigeria.
In 2008, the German engineering conglomerate Siemens paid an $800 million fine to the Securities and Exchange Commission and the Department of Justice for widespread bribery of government officials. Among the billions authorities accuse Siemens of paying out to government officials is a $2.6 million payout to former Argentinean president Carlos Menem in order to win a bid to manufacture national ID cards for the country. Other allegations include a $55 million bribe to Russian officials for a medical devices contract and $22 million to China for a metro trains contract.[6]
China appears to be the fastest growing country in every category, and now we can add fastest growing luxury market to the list. Gifts to government officials are prohibited in China, but who can resist a Swiss watch? Especially a $30,000 diamond studded one?
Bain & Company, a global consulting firm, estimated luxury sales of $7.6 million in China alone in 2008. Industry experts say “gifts” to government officials make up close to 50% of that figure. During the Communist Party meetings in March of 2009, sales of luxury goods in Beijing spiked.
One fashionable land confiscation official in Chongqing was sentenced to 13 years in prison for accepting kickbacks. Chinese officials confiscated 200 pairs of luxury shoes, 100 luxury suits, and a luxury car. He even had the nerve to tell his female trial lawyer that she needed to polish her low-quality shoes before his trial. I wonder what sort of shoes they will issue him in prison. Gucci?
What about stealing money that was intended to pay for kids’ lunches? Sodexo, the world’s largest food purchaser, had received rebates from food suppliers that it failed to pass on to school districts.
In order to continue to do business with the state, Sodexo paid a $15M fine to the state of New York for overcharging New York school district cafeterias. The organization also agreed to disclose rebates in writing to clients, establish a hotline for clients and whistleblowers, and pay for an independent audit of their compliance with rebate provisions of their contracts.[8]
Will I ever feel good about banks and Wall Street again after the economic crash of 2008? I don’t think so. I am afraid our business schools are churning out opportunistic financiers looking for a quick buck! And unsophisticated governments are easy targets for these hucksters because governments have access to lots and lots of money.
When local governments issue bonds, they often don’t use the proceeds right away. Instead of letting the money languish in a low-interest account, governments often hire brokers to help them find investment contracts so they can earn more on their money. The U.S. Treasury requires that these contracts be bid on competitively to maintain the tax-exempt status of the proceeds.
Bank of America, seeing an opportunity to get a piece of the action, pursued these contracts in a big way. But they came up with a way to decide in advance which bank would be the winner of certain contracts and they did their best to cover their tracks. They occasionally submitted intentionally losing bids so that the bidding would look legitimate. As a result of bid manipulation, the Justice Department said Bank of America won investment contracts at “artificially determined price levels, which deprived municipal issuers of money and property.” And, as of this writing, the investigation has only just begun. On June 22, 2012, Moody’s downgraded Bank of America’s public finance obligations.
“This ongoing investigation has helped to expose widespread corruption in the municipal reinvestment industry,” said Robert Khuzami, director of enforcement at the SEC, one of the agencies in the probe. “The conduct was egregious – in return for business, the company repeatedly paid undisclosed gratuitous payments and kickbacks and affirmatively misrepresented that the bidding process was proper.”
As a result, four federal agencies and 20 states received a sweeping $137 million in their settlement with Bank of America for its role in a bid-rigging scheme that ripped off state agencies, cities, towns, and not-for-profits seeking to invest yet unspent bond proceeds.[9]
A former agent of a financial products and services company pleaded guilty today for his participation in fraud conspiracies related to contracts for the investment of municipal bond proceeds and other municipal finance contracts, the Department of Justice announced.
According to plea proceedings today in U.S. District Court in New York City, Adrian Scott-Jones, a resident of Morriston, Fla., pleaded guilty to participating in two separate fraud conspiracies with companies that provide a type of contract, known as an investment agreement, to public entities throughout the United States, such as state, county and local governments and agencies. These public entities were seeking to invest money from a variety of sources, primarily the proceeds of municipal bonds that they issued to raise money for, among other things, public projects. Scott-Jones also pleaded guilty to one count of wire fraud. According to the plea agreement, Scott-Jones has agreed to cooperate with the ongoing investigation.
The department said in court documents that Scott-Jones’ former company, located in North Palm Beach and Ocala, Fla., marketed financial products and services, including services as a broker or advisor to various public entities that issue municipal bonds. Public entities typically hire a broker to conduct a competitive bidding process for the award of investment agreements. Major financial institutions, including banks, investment banks, insurance companies and financial services companies, are among the providers of investment agreements and other related municipal finance contracts. Competitive bidding for these agreements is the subject of regulations issued by the U.S. Department of the Treasury and is related to the tax-exempt status of the bonds.
GAO Green BookAccording to court documents, Scott-Jones participated in one fraud conspiracy from as early as September 2001 until at least November 2006, and in a second fraud conspiracy from as early as August 1999 until at least November 2006. In each conspiracy, Scott-Jones gave co-conspirator providers information about the prices, price levels or conditions in competitors’ bids, a practice known as a “last look,” which is explicitly prohibited by U.S. Treasury regulations. Scott-Jones also solicited and received intentionally losing bids for certain investment agreements and other municipal finance contracts. As a result of the bid manipulation, the co-conspirator providers won contracts at artificially determined price levels, which deprived municipal issuers of money and property.
The court documents also charge that Scott-Jones and co-conspirators misrepresented to municipal issuers or their bond counsel that the bidding process was in compliance with U.S. Treasury regulations. This caused the municipal issuers to award investment agreements and other municipal finance contracts to providers that otherwise would not have been awarded the contracts if the issuers had true and accurate information regarding the bidding process. Such conduct caused municipal issuers to file inaccurate reports with the Internal Revenue Service (IRS) and thus placed the tax-exempt status of the underlying bonds in jeopardy.
Each of the fraud conspiracies for which Scott-Jones is charged carries a maximum penalty of five years in prison and a $250,000 fine. The wire fraud charge carries a maximum penalty of 20 years in prison and a $250,000 fine. The maximum fines for each of these offenses may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime, if either of those amounts is greater than the statutory maximum fine.
This is the sixth guilty plea to arise from an ongoing investigation into the municipal bonds industry, which is being conducted by the Antitrust Division’s New York Field Office, the FBI and IRS Criminal Investigation. The department is coordinating its investigation with the Securities and Exchange Commission, the Office of the Comptroller of the Currency and the Federal Reserve Bank of New York.
Three former employees of Rubin/Chambers, Dunhill Insurance Services Inc., also known as CDR Financial Products, a Beverly Hills, Calif.-based financial products and services firm that acted as a broker of investment agreements and other municipal finance agreements, have pleaded guilty to bid-rigging and fraud conspiracies in relation to the ongoing investigation. Two other individuals have also pleaded guilty to charges related to the ongoing investigation.
As a result of the ongoing investigation, three former financial services executives were indicted on July 27, 2010, for participating in fraud schemes and conspiracies related to the bidding for investment agreements. In addition, CDR, two of its employees and one former employee were charged in October 2009 for participating in bid-rigging and fraud conspiracies and related crimes. The CDR trial is scheduled to begin on Sept. 12, 2011.
An illegal gratuity is when someone gives gifts or gratuities in hopes of future favor. The gifts are not tied to any particular favor or decision, they are intended to influence the recipient’s future decisions.
For example, imagine a government official who encourages corporations to fund his re-election campaign. The corporations and the official running for office understand that the corporations will experience preferential treatment from the official in the future. Sound like some remote South American banana republic? Unfortunately, this is how our “system” works in America.
If a lobbyist gives a government official a significant campaign contribution and helps her raise more money for her campaign while at the same time explaining his position on, let’s say, drilling off of the coast of Alaska, is that bribery, extortion, or illegal gratuities? Or is the congresswoman suffering from conflict of interest? The behavior of our congresspeople might be considered all three at once.
I got in hot water a few years ago with one of my government clients for allegedly trying to influence their buying decisions. I was only trying to show appreciation, which is pretty common in the commercial realm. I receive a half-dozen gifts each Christmas from my vendors and my clients and I thought I would join in. One of my last names is Hart, and so I thought it would be cute to send out Valentine’s gifts to my clients instead of Christmas presents. Get it? Hart, Valentines? So, I sent a small heart-shaped dish full of Dove chocolate to one of my legislative audit clients. They promptly sent it back to me with a scolding letter from their lawyer admonishing me never to give them a gift again. I guess they thought an $8 gift qualified as an illegal gratuity! Whoops.
Some people mistakenly confuse the terms extortion and bribery. The difference between bribery and extortion is in who makes the first move. The person wanting a favor from a powerful person initiates bribery. In extortion, the person in power initiates the transaction. In other words, in extortion the public official asks for goodies instead of being offered goodies.
One contractor told me that the head of the purchasing department for a large city always held a meeting with the bidders on a project before the project was awarded. The experienced contractors realized that he was asking for gifts when he said things like, “My car is so filthy. It needs a detailing!” “Or, my lawnmower sure is getting tired.” Whichever contractor took care of his car or bought him a new lawnmower was awarded the project. The contractor admitted to engaging in some funny business of his own. All of the contractors would meet frequently and decide who among them would get that particular contract. They took turns and counseled each other on what to charge. One good turn deserves another, eh?
David Letterman was in the news in 2009 because the boyfriend of the woman with whom he was having an affair threatened to expose his infidelities to the public unless David Letterman paid the boyfriend several million dollars. Wisely, David Letterman decided to fess up to the affair on the air (and he took a whopping 30 seconds to do so), but he turned the boyfriend into the authorities first. What an interesting turn of events for the boyfriend. He is broke, girlfriendless, and in prison for extortion.
Broward County Public School Board member, Beverly Gallager, was arrested for extortion, wire fraud, and bribery after undercover FBI agents passed $12,500 to her in return for her awarding construction contracts. U.S. Representative, Debbie Wasserman Shultz, was appalled saying, “It shakes the confidence of the public in their elected leaders.”[11]
When you gather your team together to brainstorm the risks of fraud in order to plan your audit (this procedure is required if you are following AICPA or Yellow Book standards), make sure you consider the four facets of government corruption in your discussion.
Have you ever wanted to say something in your audit report that you can’t support with evidence? Or have you ever wasted a significant amount of time on an audit methodology that you didn’t need to perform? Are you using a canned audit program that was created years ago for someone else’s audit?
