by Neil V. Getnick and Lesley Ann Skillen

Published in the New York Law Journal, July 15, 1994

Is there a solution to industry-wide corruption in the management of co-op housing and condominiums alleged in the Manhattan District Attorney’s Office’s recent indictments of New York real estate managers and companies? One proposal that some companies have already agreed to is to hire an Independent Private Sector Inspector General or IPSIG to monitor for kickbacks and related activity.

Both our local and regional federal prosecutors’ offices have focused on industry prosecutions in recent years. Prosecutors in the Manhattan District Attorney’s office, the U.S. Attorneys for the Southern and Eastern Districts of New York and the New York State Organized Crime Task Force have recognized the critical importance of structurally reforming corrupt industries. This has taken the form of remedies designed to control and reform organizations by monitoring their activities in cases targeting the garment center trucking industry, corrupt unions, the City’s concrete industry, the Fulton Fish Market, and the Long Island carting industry.

The Federal Sentencing Guidelines adopted in November 1991 are indicative of the standards to which business organizations and their officers are now held. The guidelines provide for the sentencing of organizations to be determined primarily by these factors: (a) the steps taken by the organization prior to the offense to ensure that it has an effective program to prevent and detect violations of the law; (b) whether high level personnel either participated in, condoned or were wilfully ignorant of the criminal activity; and (c) whether the organization reported the offense it detected promptly, fully cooperated in the investigation, and accepted responsibility for its criminal conduct.

The IPSIG holds out a potential private sector solution to industry-wide corruption. Likewise, it is wholly compatible with the Federal Sentencing Guidelines. An IPSIG is an independent, private sector firm with legal, auditing, investigative, and loss prevention skills, employed by an organization to ensure compliance with relevant law and regulations and to deter, prevent, uncover and report unethical and illegal conduct by, within and against the organization.

The IPSIG concept grew out of the 1989 New York State Organized Crime Task Force (OCTF) Construction Industry Report which envisaged that IPSIGs (then termed Certified Investigative Auditing Firms of CIAFs) would be compulsorily hired by general or prime contractors on public construction projects in excess of $ 51 million, with a minimum of 2 percent of the project cost dedicated to funding the CIAF. The role of the CIAF was primarily to scrutinize the revenues and expenditures of the contractors to expose payment of bribes and to design and monitor programs and strategies to deter and detect corruption. The New York City School Construction Authority’s Inspector General has since implemented a targeted program based on this concept.

As first introduced by OCTF, the IPSIG or CIAF was a bare bones concept. In July 1993 the New York State Bar Association Commercial and Federal Litigation Section adopted a report, written in conjunction with OCTF’s Director, Ronald Goldstock, that develops and defines the IPSIG concept in considerably broader terms. It is of crucial importance that attorneys considering the use of an IPSIG on behalf of clients understand precisely what the term encompasses.

Adaptable for Wide Use

The IPSIG is adaptable to a variety or organizations and uses. Where an organization is primarily legitimate or amendable to reform, an IPSIG, in addition to the prevention and control of illegal or unethical conduct, may be a major participant with management in enhancing the economy, efficiency and effectiveness of the organization. Where an organization is primarily illegitimate and hostile to change, the IPSIG’s role may be adversarial, limited to instituting internal controls and monitoring organizational activity. Whatever the role of the IPSIG, however, it always remains independent, even when hired voluntarily by the organization. An attorney considering the use of an IPSIG on behalf of a client must keep this foremost in mind. An IPSIG, although interactive with the host organization, is autonomous and unconstrained by organizational biases. By definition, an IPSIG is an independent entity free to report violations of the law as appropriate without the specific approval of the host organization.

Organizations seeking a compliance mechanism need not employ an IPSIG. An organization, for example, might choose to engage a compliance monitor without reporting independence. Such an entity, however, would not be an IPSIG with its attendant guarantees of adherence to professional standards, particularized skills and official certification as envisioned by the State Bar.

Why then would an organization hire an IPSIG at all? In its role of designing and implementing programs to prevent and detect violations of the law, an IPSIG helps an industry or business to protect and promote its reputation for integrity and fair dealing; to minimize the intrusiveness of government regulations; and to cut costs and improve efficiencies by controlling unethical or wasteful practices by employees. In an organization or industry already tainted by fraud or corruption, an IPSIG can implement reforms and re-establish its credibility in the marketplace. In some circumstances, a prosecutor may decide not to prosecute as harshly or at all based on the organization’s hiring or an IPSIG.
In a business operating in a fundamentally corrupt environment, an IPSIG is ideally suited to perform the oversight, audit and reporting functions of a court-appointed monitor. New York City Public Advocate Mark Green has already endorsed the use of legislatively mandated IPSIGs in connection with a bill before the New York City Council which would create two experimental commercial carting districts and allow carting companies to bid for the exclusive license to service each of these districts.

Ultimately the IPSIG may hold the answer for the type of in-depth long-term monitoring needed to structurally reform corrupt industries and to give businesses which wish to operate legitimately a real ability to do so.