New York City has taken a tough line with construction firms that are involved in illegal activity. After looking at the case of Structure Tone, you wonder how long it will be before we take similar action here
Sophia Perkis’ column in Building on 20 June this year noted the daily risks of fraud and corruption in the construction industry - particularly within its extended supply chain.
She noted that as the supply chain increases there can be a correlating decrease in control and increase in the opportunities for fraud. She mentioned over-invoicing, theft/substitution of materials, bid/contractor fixing and bribery/corruption. She suggested that an offence be reported to the police or the Serious Fraud Office but focused particularly on the possibility of civil claims.
But from across the Atlantic there is surely a better example of what is needed in order to deal with this evidence. The Manhattan district attorney’s office has been engaged in a continuing investigation into fraud and corruption in the New York City construction industry. The district attorney, Cyrus Vance Jnr, has issued a press release noting that over the past six years the Manhattan district attorney’s office has obtained more than 40 convictions from scores of individuals and corporations, including some of the largest general contractors in New York City, for kickbacks and bid rigging schemes, and recovered more than $50m through these prosecutions.
That same press release comments on a joint investigation also involving a detail of the Special Investigations Unit of the New York state police assigned to the Rackets Bureau. The particular case related to the conviction of Structure Tone Inc for falsifying purchase orders with the intent to defraud their construction management clients.
The company pleaded guilty and forfeited $55m - according to DA Vance “one of the largest forfeitures ever imposed on a construction company - [it] sends a clear message that this type of criminal activity will not be tolerated.”
The scam apparently involved:
- Structure Tone requiring trade contractors on construction management jobs to increase their bids by adding, in many cases, unnecessary contingencies listed in an addendum provided by Structure Tone called “the Rider B”. This practice was concealed from the construction management clients
- Once the construction management clients agreed to pay the increased bids, Structure Tone also procured additional discounts and savings from these contractors that were not passed along to clients
- Structure Tone then created fraudulent purchase orders containing these increased amounts (from the Rider B) and omitting any discounts provided by trade contractors
- in many cases causing the construction management clients to overpay. The trade contractors held these overpaid amounts for Structure Tone
- Structure Tone recovered these overpaid amounts by inducing the same contractors to provide discounts to Structure Tone on other, unrelated projects which had been let under a main contract (where of course Structure Tone charged its clients on a lump sum basis and its arrangements with its subcontractors were not open book and any profit accrued to Structure Tone).
Structure Tone’s code of conduct and business ethics notably contains the following statement: “Employees are prohibited from soliciting or accepting kickbacks, rebates, or any form of ‘under the table’ payments, either directly or indirectly.”
Structure Tone has worked on St Patrick’s Cathedral and on the Federal Reserve Bank of New York’s new headquarters so the targets of their fraud are not naive or domestic clients. And presumably their penalties will not be limited to fines but will include eternal damnation.
So are we seriously convinced that this does not happen here?
We all suspect that it does even if the evidence of it is hard to come by. And it is not good enough to argue that, at the end of the day, there is a price for the project and, if hidden profits are not made, that price increases since, on Structure Tone’s model at least, it is construction management clients who are being ripped off in order to subsidise additional profit on lump sum jobs.
So when will we see similar concerted action against this kind of crime here?
Ann Minogue is a partner in Macfarlanes