Report of the New York State Bar Association Commercial and Federal Litigation Section 1995
I. Introduction
Corrupt activities by racketeers, carting companies and the union representing carting employees in New York City have been well-documented in congressional hearings, government investigations, research reports, newspaper articles and judicial opinions. There have been several prosecutions against the major racketeers in the industry, with several more underway, and various attempts to regulate the activities of carters. Despite these attempts to rid the New York City garbage industry of corruption and promote competition, we are advised that they continue to operate anti-competitively. This report will recommend that New York City enact legislation to fundamentally restructure these industries.2
The New York City garbage industry is divided into two sectors. The collection of garbage from residential customers is conducted by the New York City Sanitation Department. Commercial garbage collection has been privatized and commercial establishments negotiate individual garbage collection contracts with private carting companies. Corruption and racketeering, we are advised, have primarily affected the commercial sector.
Since 1956, when New York City ended public collection service to commercial establishments there has been evidence of anti-competitive behavior on the part of carting firms.3 Once a customer is allocated to a particular carter, other carters refrain from bidding for the business of that customer. In hearings before the Department of Consumer Affairs (DCA), carters have stated that the allocation of a customer to a particular carter gives the purchaser the exclusive right to service that customer.4 This so-called “property rights” system also allows carters to sell their customers to other carters that are members of the cartel.5
II. Structural Reform of the Carting Industry
During the past forty years, state and local agencies have tried a variety of strategies to increase competition in the New York City garbage industry — including prosecution and regulation. Unfortunately, neither of these strategies, we are advised, has been very effective. As a result of the failure of these strategies to improve the garbage industries, the New York State Organized Crime Task Force and RAND Corporation issued a 1987 report which recommended structural reform of the carting industry as the best means of ridding the industry of racketeers, increasing competition and lowering prices.
A. Structural Reform v. Prosecution and Regulation
Certain industries are more susceptible to racketeering than others.6 Racketeers are likely to play an important role in markets that have certain characteristics, including “strong incentives to create a cartel (inelastic demand for the good or service, little product differentiation, etc.) coupled with impediments to its formation (numerous firms, low barriers to entry, etc.)”7 In addition, certain industries may be more vulnerable to racketeering because: they have a labor market that can be influenced by organized crime; the industry is highly competitive and consists of many small firms; it is easy to generate and conceal cash payments within the industry; and, the industry contains many opportunities for illicit profit.8 Since the carting industry possess a number of these characteristics, prosecution and regulation need to be supplemented with structural reform.
1. Prosecution
One problem with prosecution is that it tends to be sporadic. The high cost of prosecution, coupled with the time involved in investigating and litigating complex cases, tends to prohibit constant pressure.9 Another problem with relying solely on prosecution is that the sentences tend to be inadequate. For example, in 1984, after eighteen months of investigations, the New York State Organized Crime Task Force obtained indictments against many of the principal figures in the Long Island Carting Industry. After several years of litigation, most of the defendants pleaded guilty to charges of coercion and conspiracy to commit bribery.10 The judge sentenced all those who pleaded guilty to five years’ probation plus some community service.11 Furthermore, even if the sentences are severe enough to prevent a particular racketeer from participating in the industry, the structure of the industry remains unchanged and therefore, racketeers can be easily replaced.12 As Peter Reuter recently stated about the attempts to remove a particular individual from the Long Island carting industry, “If you remove [the individual], there will be tremendous financial pressure for the carters to find another [individual] type to replace him. The free entry of carting firms into the Long Island market is the only way to ensure the lowest price and the absence of organized crime.”13
2. Regulation
In New York City, the DCA’s extensive regulatory authority over the carting industry, we are advised, has not induced competition.14 One reason why regulation has failed, is that regulators rarely possess the resources or expertise to investigate and monitor racketeering activities. Therefore, regulatory agencies have trouble preventing fraud and other means of avoiding regulations. In addition, most traditional regulatory approaches have focused on controlling racketeers rather than restructuring an industry to be less vulnerable to racketeers. Another disadvantage associated with implementing comprehensive regulations is the significant costs they impose on the regulatory agency and taxpayers.
B. Type of Structural Reform Recommended
The 1987 OCTF/RAND report on the Long Island garbage industry proposed a plan specifically tailored to that industry’s problems and characteristics. The New York City Public Advocate has recently proposed legislation to adopt portions of that plan in New York. This section will detail the original proposal and explain its characteristics. The following section will provide a recommendation for implementing a revised version of that plan in New York City.
The original proposal for restructuring the garbage industry consisted of several parts. The proposal called for the creation of a regional authority to supervise the contracting of private garbage collection. The authority would be empowered to create a comprehensive set of garbage collection districts, which would include all customers receiving private sanitation service. Each district would be large enough to support a carting firm and allow the firm to operate at maximum efficiency.
After the creation of the districts, the authority would solicit bids from carting companies interested in providing service to the entire district. All businesses and residences receiving private sanitation service within the district would be required to provide the authority with information that would allow the authority to estimate the service requirement for the district. In evaluating the bids, the authority would consider a number of different factors about the type of service being offered, including price, frequency of service and the characteristics of the garbage within the district. The rationale for creating the districts was to prevent carters from negotiating with individual customers and dividing up the customers amongst themselves.
Finally, the authority would create a public benefit corporation to provide competition to the private carters. The public benefit corporation would operate as a carting enterprise and would bid on randomly selected districts at prices that it estimated were sufficient for it to earn a market rate of return on its equity. The purpose of the public benefit corporation would be to prevent carters from undermining the creation of the districts, by ensuring that the private carting companies were not allocating the districts amongst themselves and rigging the bids on the districts. According to the proposal, the public benefit corporation would deter bid rigging because if the private companies bid too high on a district that the public benefit corporation was competing for, the public benefit corporation would get the contract and effectively deny the private carting company of its livelihood. In addition, it was envisioned that the public benefit corporation would help the regional authority estimate the actual cost of servicing particular districts.
The benefits of creating garbage districts include a low cost to the government and taxpayers, and a fundamental restructuring of the industry to make it less vulnerable to racketeers.15
III. Specific Recommendation of Civil Prosecution Committee
It is the recommendation of Civil Prosecution Committee that New York City adopt a modified version of the original proposal. New York City should enact the legislation that is currently before the New York City Council to create experimental garbage collection districts. However, that legislation should be amended as suggested below.
A. Pending Legislation
The New York City Council should enact the Public Advocate’s proposed legislation to create experimental districts in New York City. The bill pending before the City Council would authorize the commissioner of DCA to establish special trade waste removal districts in which private carters compete for the opportunity to provide collection service.16 The initial plan would be to create two districts, one in midtown Manhattan, and one outside of Manhattan. Only the carter receiving the contract to service commercial establishments within a district will be authorized to collect trash within that district. Every owner or operator of a commercial establishment within a district will be required to obtain a permit from the DCA for disposal of its own waste, and no commercial establishment will be able to use a carter other than the carter granted the franchise to collect trash within the establishment’s district. The commissioner of DCA will award the contract based upon the qualifications of proposers, the nature and frequency of the trade waste removal services proposed to be provided, the rate or rates to be charged to commercial establishments for such services, the nature and extent of recycling services proposed to be provided, and any other information relating to performance standards, customer service and security of performance the commissioner deems appropriate. Each customer will pay the carting company the rate specified in the contract between the DCA and the carter serving their district. The agreement will be for a period not exceeding two years and can be terminated for violations of the agreement. The agreement will specify: the frequency of collection, rate to be charged commercial establishments per cubic yard; the recycling services to be provided; any other appropriate requirements relating to performance standards, customer service, security of performance, or such other matters as the commissioner deems necessary to effectuate the purpose of the law. The law also provides for enforcement against violators, and the seizure and forfeiture of violating vehicles. Finally, the law requires different companies to service the first two trade waste removal districts created.17
B. Proposed Amendments
1. Auditing Requirement
The original proposal included the creation of a public benefit corporation to compete with private carters in randomly selected districts. While the public benefit corporation might be required in a fully implemented program, it is less likely to fulfill its functions in an experimental program with only a few established districts.
In place of the public benefit corporation, we recommend that every private carting company receiving a contract to provide service within an exclusive licensing district be required to hire an Independent Private Sector Inspector General(IPSIG)18. An IPSIG is an independent, private sector firm with legal, auditing, investigative, and loss prevention skills, employed by an organization (voluntarily or by compulsory process) 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’s reporting requirement is independent from the organization which employs it, so the IPSIG is required to report violations of law regardless of the permission of the organization.19 In addition, IPSIGs are required to be certified and licensed by a regulatory , administrative or law enforcement agency relevant to the organization’s area of business.
The IPSIG concept was first described in the New York State Organized Crime Task Force’s Report on Corruption and Racketeering in the New York City Construction Industry. As described by OCTF, an IPSIG (termed a Certified Investigative Auditing Firm (“CIAF”) in the OCTF report) would be required to be hired by all general or prime contractors on public construction projects in excess of $5 million, with a minimum of 2 percent of the project cost dedicated to funding of the CIAF.20 The role of the CIAF would be to scrutinize the revenues and expenditures of the contractors to expose payment of bribes and to design and implement programs and strategies to deter and detect corruption. The CIAF concept has been utilized by OCTF in several cases,21 In addition, the New York City School Construction Authority has utilized the IPSIG concept. In 1990, the SCA required a major construction company with a history of criminal activity, which was about to be awarded a large contract, to retain the services of an Investigative Auditing Firm (“IAF”) at the construction company’s expense. The IAF was required to monitor and enforce the company’s adherence to the contract and implement a corruption prevention program. The construction company was further required to provide the IAF with access to all of the company’s books, records and operations. In addition, the IAF was required to report all of its findings to the SCA.22
As the IPSIG concept has developed, it has become an important mechanism by which government agencies can enforce the contracts they enter into with private companies. Since the government is conferring a benefit upon a carter by granting them an exclusive license to service customers within a particular district, the carters should be required to hire an IPSIG as part of qualifying for the contract. Any carter receiving a contract to provide service within a district will be required to hire, at their own expense, an IPSIG. Among the functions that an IPSIG would perform for carters are: monitoring and investigating the activities of the organization to detect illegal and unethical conduct and to report possible violations of the law to relevant law enforcement authorities; designing and supervising the implementation of programs and procedures to prevent violations of the law and related unethical conduct; designing and implementing programs to raise and maintain ethical standards within the organization; and, assisting in the design and implementation of policies and procedures to enhance the economy, efficiency and effectiveness of the organization. Reliance on an IPSIG, will also allow the existing carting firms in New York City to bid on the districts, and allow the regulatory agencies to place some confidence in these firms’ ability to complete the contracts.
An IPSIG is especially important in an industry such as carting, where many of the firms who can bid on the districts are likely to have a history of racketeering and anti-competitive behavior. The IPSIG will perform important monitoring services and prevent activities which could undermine the exclusive licensing plan, including private deals between customers and carters, labor racketeering, illegal dumping and political corruption. The IPSIG will also prevent carters from overreporting the amount of garbage they are collecting. As mentioned earlier, carters are currently able to undermine the DCA’s regulations establishing a maximum rate carters can charge for their services. The carters evade this regulation by overstating the amount of garbage they collect. Since customers would still pay carters directly under the exclusive licensing plan, carters will still be able to undermine the regulatory process. An IPSIG would be able to monitor the behavior of carters and prevent this type of activity. Finally, the IPSIG will help the regulatory agency monitor actual service levels.
While the existing proposed legislation contains general language that would allow the commissioner of consumer affairs to require the companies receiving the contracts to hire an IPSIG,23 a more specific amendment should be added. Without a specific amendment, any imposition of such a requirement by the DCA might be challenged by the carters receiving the contracts or the DCA may decide against implementing an IPSIG requirement.24
Therefore, the following amendment is proposed:
§ 5. Subchapter eighteen of chapter two of title twenty of the administrative code of the city of New York, is amended by adding new section 20-332.5 to read as follows:
§ 20-332.5 Special trade waste removal districts; requirement that licensees hire Independent Private Sector Inspector General. a. The commissioner shall require any person or persons who receives a license to operate within a special trade waste removal district under an agreement with the commissioner pursuant to section 20-332.1 of this code, (hereinafter, licensee) to hire an Independent Private Sector Inspector General (IPSIG). The IPSIG shall: remain in the employ of the licensee for the duration of the agreement; be required to be certified pursuant to paragraph g of this section; and, shall have an obligation to report violations of law to the commissioner and other law enforcement agencies.
b. The licensee shall be required to dedicate a percentage of the total amount of revenue it will receive as the licensee to finance the IPSIG, such percentage to be common to all licensees and to be promulgated by the commissioner.
c. The IPSIG will perform the following activities: monitoring and investigating the activities of the licensee to detect illegal and unethical conduct and to report possible violations of the law to relevant enforcement authorities; designing and implementing programs and procedures to prevent violations of the law and related unethical conduct, including preventing fraud and other illegalities by, against and within the licensee’s organization, and ensuring that laws, rules and regulations relevant to the business of the licensee are complied with. In addition, the IPSIG may, in appropriate circumstances, assist the licensee in designing and implementing programs to raise and maintain ethical standards within the licensee’s organization, including a code of ethics, and in designing and implementing policies and procedures to enhance the economy, efficiency and effectiveness of the licensee.
d. The IPSIG will be given the following: access to all books, records, files, accounts and correspondence of the licensee; power to subpoena witnesses and documents and to take testimony formally or informally, under oath or otherwise of the licensee: access to employees of the licensee consistent with their constitutional rights; ability to receive the assistance of New York City law enforcement authorities upon request and without charge to the IPSIG or the licensee. In addition, the IPSIG will have power to make recommendations to the licensee with respect to: discipline, dismissal, removal and replacement of employees of the licensee; withholding salaries, fees and benefits from persons who have misappropriated funds from the licensee; reviewing and/or terminating certain business operations of the licensee, such as major contracts entered into by the licensee. Provided that the IPSIG has given adequate notice to the licensee and the reasons for its recommendations, the IPSIG shall report the licensee’s failure to implement the IPSIG’s recommendations or otherwise remedy the situation to the IPSIG’s satisfaction to the commissioner forthwith.
e. The IPSIG must submit reports to the commissioner every six months throughout its employment setting forth for that period: the business activities of the licensee; the activities of the IPSIG; whether any of the licensee’s practices fail to minimize opportunities for criminal activities or violations of the Department of Consumer Affairs rules or regulations; recommendations for eliminating such practices; and any other information that the may be relevant to the enforcement of the licensee’s agreement with the commissioner or the commissioner’s enforcement of the Department of Consumer Affairs rules and regulations. The reports prepared by the IPSIG shall be treated confidentially by the Department of Consumer Affairs except insofar as the Department of Consumer Affairs determines that disclosure is required for the appropriate discharge of its duties. The reports prepared by the IPSIG shall constitute confidential investigative records for law enforcement purposes within the meaning of the New York Freedom of Information Law.
f. In order to be certified by the commissioner, the IPSIG must possess legal, investigative, audit and loss prevention skills, and be certified by the appropriate government agency or professional organization licensing persons to use these skills. In addition, the IPSIG must have the ability to apply the methodologies associated with loss prevention.
g. This section will be construed liberally to effectuate its purpose.
h. If any provision of this section is found to be violative of local, state or federal law, that provision will be severed and the other provisions will remain in effect.
2. Prequalification Requirement
Any carting company interested in bidding for a license should also be required to certify that they are qualified to do business as a carter. A program requiring prequalification of companies seeking government contracts has been successfully implemented by the New York City School Construction Authority Inspector General’s Office.25 In order to be found qualified to receive a carting license, each company should be required to demonstrate that it has a reputation for and a record of law-abiding and ethical conduct. The regulatory agency should require every carter interested in bidding on a contract to hire an IPSIG to certify that the carter is qualified to receive a license. In order to make this determination, the IPSIG will scrutinize the company’s financial history, and the background of its owners, officers and all affiliated companies.
Therefore, the following amendment should also be added to the proposed legislation.
§ 6. Subchapter eighteen of chapter two of title twenty of the administrative code of the city of New York, is amended by adding new section 20-332.6 to read as follows:
§ 20-332.6 Special trade waste removal districts; requirement that licensees be prequalified. a. Any person or persons responding to a request for proposals pursuant to section 20-332.1 of this code shall be required to be prequalified by the commissioner.
[Prequalification Provisions]
f. This section will be construed liberally to effectuate its purpose.
g. If any provision of this section is found to be violative of local, state or federal law, that provision will be severed and the other provisions will remain in effect.
IV. Conclusion
The nature of the carting industry, with its apparent high susceptibility to racketeer influence, mandates the achievement of structural reform in conjunction with the traditional approaches. This Committee supports the legislation currently pending before the New York City Council to create experimental trade waste removal districts, in which private carters would compete for the exclusive right to provide collection services, at a rate to be specified in the contract between the DCA and the carter servicing the district. In order to minimize the influence of organized crime in the industry, the Committee recommends that the pending legislation be supplemented by a requirement that each successful bidder hire, at its own expense, an Independent Private Sector Inspector General (IPSIG), or private investigative audit firm, to monitor and investigate the commercial and financial activities of the carting company in order to deter, detect and report violations of the law and regulations and related unethical conduct. The IPSIG would operate to prevent activities which could undermine the exclusive licensing plan, including all forms of labor racketeering (extortion, bribery, kickbacks, etc.), underreporting of garbage collected and illegal dumping. The IPSIG would be certified and licensed by the DCA and would have no discretion in the reporting of violations of law and regulations by the carter to the DCA.
Effective measures to reduce the influence of organized crime in legitimate industry must target not only the individuals who operate within that industry but the organizational means by which they maintain control. The carting industry in New York City must be freed from racketeer-controlled cartelization in order to operate in an open and competitive manner. The structural reforms recommended in this Report, together with continuing aggressive prosecutorial action and regulatory oversight, are designed to achieve that objective.