Structural Reform: The Front Line Fight Against Business Crime

by Neil V. Getnick & Lesley Ann Skillen

Published in the NY Litigator, Vol. 1, No. 2, November 1995.

Introduction: New perspectives on Organizational Crime

In November, 1991, the federal corporate Sentencing Guidelines became law.  In contrast to traditional prosecutive methods, the Guidelines mandate a preventive approach to corporate crime control that assigns responsibility to each company to implement an anti-crime program, to monitor compliance with that program, to report any criminal conduct detected through such a program to the government and to fully cooperate with the government’s investigation.

In February 1992, Thomas and Joseph Gambino pled guilty to illegal restraint of trade and agreed to pay a $12 million fine and divest themselves of their interests in businesses they had long controlled: the trucking of clothing in New York City’s $14 billion garment manufacturing industry.  The aim of the plea bargain was to break the cycle of extortion, anti-competitive practices and high shipping costs that had victimized businesses in the garment center for decades.  Under the scrutiny of a court-appointed monitor, the Gambino companies were sold.   More than seventy five new independent trucking companies took over the old routes and shipping costs declined by 20%.

What do the corporate Sentencing Guidelines and the Gambino Brothers divestiture and monitorship have in common?  Both rest upon a simple principle.  Institutional crime is primarily about institutions, and not so much about bad individuals whose conviction and imprisonment will make the problem go away.  Only by changing institutions  –  whether they are corporations, labor unions, segments of industries or whole industries  –  can crime and corruption committed by and through those institutions be corrected and prevented in the long term.

This article explores the use of structural reform mechanisms as remedial and preventive responses to corporate fraud and to the infiltration of organized crime into legitimate industry.  The responses now being crafted by courts, legislatures and government agencies complement traditional law enforcement efforts.  They seek to eradicate corruption by fundamentally changing the business environment in which it thrives.

The Civil Prosecution Committee has dedicated

three reports in the past two years to the development and application of these structural reform mechanisms.  This article will track those reports by focusing on three areas in which structural reform has found judicial and legislative voice: independent monitoring, the federal corporate Sentencing Guidelines and administrative reform.

Independent Monitoring

An independent monitor is an individual or firm that is appointed by a court or government agency or hired by an entity to oversee the entity’s compliance with the law and/or the terms of a court order or plea agreement.

History: equitable remedies under RICO

Independent monitoring follows a tradition established during the 1980s, when prosecutors began to realize that fighting organized crime was as much about attacking criminal organizations and eliminating the influence of organized crime in legitimate industry as it was about incarcerating mob leaders and their henchmen.  They began to explore the virtually unchartered territory of the federal Racketeer Influenced and Corrupt Organizations (RICO) Act’s provisions allowing courts to impose equitable remedies for racketeering activity.   They sought the appointment of trustees to replace the leadership of corrupt labor unions and monitors to scrutinize the affairs of mob-dominated corporations.

The purpose of these trustees and monitors was primarily to prevent and expose criminal activity within the organization, to report violations to government authorities and to cooperate and assist the government with its investigation.   This monitoring function  –  undertaken by outside firms with legal, investigative and audit skills  –  has since been developed, refined and implemented without the aid of RICO by various U.S. Attorney’s and local prosecutor’s offices and other law enforcement and regulatory agencies.

Independent Monitoring to Date

This strategy seeks to replace corrupt business practices with legitimate ones by simultaneously monitoring and redesigning the practices, procedures and standards of the workplace.  It has been applied by U.S. attorneys in the Southern and Eastern Districts of New York, by the New York State Organized Crime Task Force (“OCTF”) 1 and the Manhattan District Attorney’s Office; it has been adopted by the New York City School Construction Authority 2 and the New York State Department of Environmental Conservation. 3   Monitors have been appointed to oversee the activities of corrupt unions under federal racketeering laws 4 and of companies operating in mob-dominated industries such as carting 5 and, as noted above, the New York City garment center. 6   Firms in legitimate mainstream industries, including the real estate management industry 7 and the securities industry, 8 have also agreed to appoint monitors after a fraud or corruption scandal.  Monitoring has also been used by the Securities and Exchange Commission in the appointment of special investigative counsel as part of a consent decree. 9

The Independent Private Sector Inspector General

In 1993 the Civil Prosecution Committee produced a report entitled “The Independent Private Sector Inspector General” (IPSIG). 10    The IPSIG concept grew out of the 1989 OCTF Construction Industry Report 11 which envisaged that IPSIGs (then termed Certified Investigative Auditing Firms or CIAFs) would be compulsorily hired by general or prime contractors on public construction projects in excess of $5 million, with a minimum of 2% of the project cost dedicated to funding the CIAF. 12   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.  The Civil Prosecution Committee’s report, written in conjunction with OCTF’s then Director, Ronald Goldstock, developed and defined the IPSIG concept in considerably broader terms.

An IPSIG, as developed by the Civil Prosecution Committee, functions to ensure the monitored firm’s compliance with relevant laws and regulations, to prevent, uncover and report illegal acts within and against the firm,  and to assist the firm to enhance corporate efficiencies, raise and maintain ethical standards and promote cultural change.  An IPSIG has these key elements:

1 . Integrated functions (prevention, detection and reporting of violations within and against the corporation; enhancing corporate efficiency and economy; promoting an ethical culture);

2 . Independence (complete autonomy in reporting to the authorities any violations of law and regulations uncovered as a result of its work); and

3 . Specialized skills and methodology (legal, auditing, investigative and loss prevention).

An IPSIG is ideally suited to perform the oversight, audit and reporting functions of a court appointed monitor.  As further discussed below, 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 to reform the waste disposal and collection industry.  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 that wish to operate legitimately a real ability to do so.

Independent monitoring makes good business sense both for the government and the monitored firm.  The monitor’s functions are as much about enhancing the firm’s profitability as they are about policing its activities;  fraud, waste and abuse are rarely good business.  A part of the monitor’s role is to protect the firm’s profit-making interests at the same time as (and by) ensuring that corporate acts are legal and ethical.

The Federal Corporate Sentencing Guidelines

The Federal Sentencing Guidelines adopted in November 1991 1 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:

1. 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;

2. whether high level personnel either participated in, condoned or were wilfully ignorant of the criminal activity; and

3. whether the organization reported the offense it detected promptly, fully cooperated in the investigation, and accepted responsibility for its criminal conduct. 13

The Guidelines declared, through a statutory framework providing both for certainty and complexity in sentencing, that organizational crime control is not primarily a government responsibility, but a corporate responsibility.  Organizations must take positive steps to prevent, detect and accept responsibility for criminal acts by their officers and employees, and must promptly report those acts to government authorities and co-operate with the government’s investigation.  The organization which complies with the Guidelines will be rewarded, in the event of its conviction on criminal charges, by a mitigated sentence or, since the Department of Justice has taken the Guidelines into account not just in sentence but in deciding whether to prosecute, with no sentence at all. 14    The organization which fails to do so will pay heavily should any of its agents expose it to criminal liability; in some cases, it may forfeit even its potential to survive.

The key to the Sentencing Guidelines on Organizations is the maintenance, by the organization, of “an effective program to prevent and detect violations of the law.”            While there is nothing radical about compliance programs, the institutionalization of a system of corporate crime control which focuses squarely upon organizations through compliance mechanisms is a departure from traditional approaches to corporate crime as the work of individual actors.  The Guidelines seek, in effect, to revolutionize the control of corporate crime by shifting the primary responsibility for such control from the government to the corporation.  Corporations are on notice that the government will look first to the structural mechanisms in place to prevent internal fraud and illegality in determining corporate criminal liability, not just to the criminal acts of the corporate officers who perpetrated the wrongdoing.

Administrative Reform

The infiltration of organized crime into legitimate industry and the impact this has on both the quality and cost of services has been the focus of attention in New York City in recent months.  The response of City and State governments has been to seek administrative reform of the corrupted industries and organizations.

The Waste Collection and Disposal Industry

In April 1995, the Public Advocate of New York City, Mark Green, announced that he would introduce new legislation designed to curtail mob influence in the city’s commercial waste hauling industry, which was privatized in 1958 and now collects almost half of the city’s garbage.  As a result of the operation of a mob-dominated cartel, which enforces a “garbage tax” and makes it virtually impossible for customers to change carters, the cost of waste hauling in New York City is up to four times higher than other major U.S. cities.  In July 1995, the Manhattan District Attorney announced the indictment and arrests of the leadership of the cartel, including 4 trade waste associations, 17 individuals and 23 carting companies.  In addition, the District Attorney filed an asset forfeiture action seeking recovery of $268 million and the appointment of temporary receivers to oversee and manage the business and properties of the corporate defendants.

The Public Advocate’s proposed legislation would create commercial wasting hauling “competition zones.”  Carters would have to bid against each other and the Department of Sanitation for an exclusive license to collect garbage in that zone.  Prior to the award of a contract, city authorities would check financial and business records of the bidder and hold a public hearing.

Under the legislation, the successful bidder would be required to hire, at its own expense, an Independent Private Sector Inspector General (“IPSIG”) from a pre-certified list prepared by city authorities.  The IPSIG, which must have auditing, legal and investigative skills, would monitor the successful bidder’s compliance with the contract and with all relevant laws and regulations, and report directly to the Department of Consumer Affairs.

The IPSIG proposal was included in the legislation as a result of a Civil Prosecution Committee report endorsed by the Section in 1994, entitled “Report and Recommendations on Reforming the Carting Industry in New York City.”   The Report would give the IPSIG legislative authority (inter alia) to access all books and records of the company, to review or terminate business operations of the licensee and make recommendations to management with respect to dismissal, discipline or withholding salaries of officers of the company.  The carting company’s failure to implement an IPSIG recommendation would be reported to the Department of Consumer Affairs.

In monitoring the carting company’s activities, the IPSIG would be able to prevent activities which would undermine the exclusive licensing plan, such as private deals between customers and carters, all forms of labor racketeering, illegal dumping and political corruption.  The IPSIG would also prevent carters from underreporting the amount of garbage they collect, and would help the DCA enforce its regulations and monitor actual service levels.  Because the IPSIG would be paid for by the carting company, the city would be saved enforcement costs.

The Fulton Fish Market

In May, the New York City Council voted to implement Mayor Rudi Giuliani’s comprehensive regulatory plan to license and register firms operating at the City’s Fulton Fish market.  A series of City council hearings that followed the introduction of the legislation focused on the history of disorder, violence and organized crime influence at the fish market and the high cost of doing business there due to mob control.   The Civil Prosecution Committee’s Report, “Regulating and Reforming the Fulton Fish Market” endorsed the Mayor’s plan as the logical next step in the innovative war on business corruption that has been fought by local, state and federal prosecutors over the past decade.

Under the Mayor’s plan, which is currently being implemented, the City directly controls the Market.  The City has negotiated new leases, allowing the City to collect fair market rents from fish wholesalers, and authorized the Department of Business Services (“DBS”) to establish operational rates and procedures for businesses in the Market, including the imposition of stiff penalties for violations of its rules.  All businesses operating in the Market now have to be licensed, registered, and/or enter into lease agreements.  DBS decides how many licenses to issue, denying licenses to individuals found to be unfit to do business in the Market.  The Department of Investigation (“DOI”) has been authorized to conduct background investigations of businesses and employees there.  In addition, there will be an increased law enforcement presence in the Market through the joint efforts of the New York City Police Department, DOI and the U.S. Attorney for the Southern District of New York.

The Fulton Fish Market legislation goes beyond the purview of the prosecutor, enlisting an all-out commitment by the City administration to reform the structure of the Market.  It also goes beyond judicially created trusteeships and monitorships, by bringing to bear the full weight and resources of the City to restore and maintain honest business practices in industries infiltrated by corruption.  Ultimately, the plan’s success will be measured by whether it rids the Market of corruption and improves the bottom line for business and consumers.  The twin guiding principles of these kinds of efforts must be a zero tolerance for corruption and an emphasis on profitable management.

The problems of the Fulton Fish Market are not concerned with corrupt businesses, but with a corrupted business environment, creating both a law enforcement challenge and an administrative challenge.  Law enforcement must respond with both reactive and proactive investigation.  Administrative management must prevent corrupt business activity, prequalifying firms seeking to do business, and monitoring their ongoing activity to guard against the encroachment of corruption.  Criminal prosecution must be used to target those who engage in corrupt activity.  Civil prosecution must be used to take the profit out of corrupt activity and return that money to honest operations.


In 1970, the RICO statute, recognized for the first time in legislative form that crime committed by and through organizations requires a response specifically tailored to the punishment and reform of organizations, rather than simply focusing on individuals.

The challenges presented by business corruption, and the structural solutions described in this article, are not limited to the milieu of the mob and the fraudster.  All organizations and industries in which corrupt or illegal acts by insiders are a real or potential threat can benefit by recognizing that systems, as well as individual actors, breed corruption and allow it to proliferate.  The corporate Sentencing Guidelines, by placing the responsibility for corporate crime control squarely on the shoulders of corporations, recognize this also.  Through structural solutions, organizations and industries can be corruption free by independent or self-monitoring in order to foster an honest and ethical business environment.

It is in the interests of all law-abiding organizations to look to their own environment to ensure firstly, that their systems are adequate both to prevent and detect illegal acts from within, and secondly, that their corporate culture rewards and encourages ethical conduct as much as it does the pursuit of profit.

1      For example, on July 25, 1990, OCTF entered into an agreement with a Wall Street proxy solicitation firm whose principal had pled guilty to charges relating to the overbilling of clients for non-existent services and tax evasion. Under the terms of the agreement, the firm agreed to pay $1 million in restitution and to hire a monitor (termed a Certified Investigative Auditing Firm, or CIAF)”for the purpose of assuring that its business practices remain free of the kinds of criminal activities which were the subject of the conviction of its former President.”  The CIAF was also responsible for supervising the restitution process.

2      For example, in June, 1991, the SCA entered into an Agreement with a Long Island construction firm which was about to be awarded a $32 million building contract by the SCA.  The SCA desired to accept the company’s bid for the contract which was $2 million less than the next bidder, but learned that the company was the subject of an ongoing criminal investigation into alleged offenses occurring several years before and while the company was under a previous ownership.  As a condition of the award of the contract, the company agreed to adopt a strict Code of Business Ethics, to design and implement a Corruption Prevention Program and to retain (at its own expense) a CIAF to assist in the design and implementation of, and to monitor and enforce the company’s compliance with these Programs.

3      For example, on October 3, 1990, OCTF, the Department of Environmental Conservation (“DEC”) and the New York State Department of Taxation and Finance entered into an agreement with a company which operated a landfill whereby the company agreed, as a condition of the resolution of criminal and civil charges against it, to hire (at its own expense) a CIAF to ensure the company’s future compliance with environment laws and regulations and to prevent fraud, tax law violations and any other form of criminal activity.  The company and its principal also agreed to plead guilty to one count of offering a false instrument for filing (Penal Law § 175.35) and to pay close to $4 million in forfeitures and penalties.

4      Not all RICO “trusteeships” have involved the removal of the union leadership.  Some have left the leadership intact and appointed monitors to oversee the union’s activities: Local 6A and District Council of Cement and Concrete Workers, Laborers’ International Union of North America trusteeship, March 19, 1987; Roofers Local 30/30B decreeship, May 23, 1988; International Brotherhood of Teamsters trusteeship, March 14, 1989; Carpenter’s Union, 1994.

5      In March, 1994, the U.S. Attorney for the Eastern District of New York, announced the settlement of a civil RICO action filed by the United States in June, 1989 against the Private Sanitation Industry Association of Nassau/Suffolk Inc. and over one hundred other defendants.  The terms of the settlement place eight of Long Island’s largest carting companies in monitorship for a period of five years.   Seven of the eight companies are owned by the family of Salvatore Avellino, Jr., a captain in the Lucchese crime family who pleaded guilty in February, 1994, to ordering the murder of two rebel carters who were government informants.  The monitor is authorized to access to books and records of the defendants, to take sworn evidence from the defendants and to use the subpoena power of the District Court to compel sworn testimony or document production from non-defendant persons and entities.

6      In April 1992 a Special Master was appointed to oversee the sale of trucking companies owned by two members of the Gambino crime family. Thomas Gambino, his brother, Joseph, two co-defendants and four trucking companies under their control pled guilty in February 1992 to charges that they ran a mob-connected cartel that controlled trucking in New York City’s garment industry.  The defendants, as part of their plea agreement with the New York County District Attorney’s Office, agreed to pay $12 million as a fine and compensation to victims, and to subject their activities to the control and scrutiny of a court-appointed Special Master.  In addition, the Gambino brothers agreed to sell or liquidate their trucking companies within a year, and cease forever their involvement in the garment center trucking industry.

7      In 1994, real estate management company Brown, Harris, Stevens agreed to hire an independent monitor after some of its employees were indicted by the Manhattan DA’s Office on corruption charges.

8      In October, 1994, federal prosecutors in New York and Prudential Securities entered into an unusual “deferred prosecution” agreement to avoid a criminal indictment in connection with fraud in the sale of limited partnerships during the 1980s.  The settlement involved, in addition to the payment of $700 million in fines and restitution, the appointment of an “independent ombudsman,” who would report to prosecutors, to receive allegations of misconduct by Prudential employees (former Judge Kenneth Conboy), and the retention of an independent law firm to review the company’s compliance program. 

9      In re LTV Securities Litigation, 89 F.R.D. 595 (N.D. Tex. 1981), the court discussed the appointment of a Special Officer as part of a consent order between the SEC and LTV.  The court described the role of Special Officer as follows: “to investigate questionable accounting and auditing practices to determine how they can be brought into compliance with SEC standards, and to investigate the conduct of the corporation and to advise whether legal action should be taken for material misconduct found  …  Special investigative counsel are an increasingly common element of SEC consent decrees.”

10      Report of the Civil Prosecution Committee of the New York State Bar Association Commercial and Federal Litigation Section:  The Independent Private Sector Inspector General.  The report represents the development of the IPSIG concept by a Working Group comprised of representatives of law firms, investigative organizations and public agencies with experience in the implementation of the concept and related fields.  The Working Group consists of representatives of the law firms of Getnick & Getnick LLP and Stier, Anderson and Malone, the investigative firms of Decision Strategies, Inc., the Fairfax Group Ltd., Investigative Group, Inc., Katz Associates, Inc. and Kroll Associates, Inc., and the following public agencies: the New York State Organized Crime Task Force and the New York City School Construction Authority’s Inspector General’s Office.

11      Corruption and Racketeering in the New York City Construction Industry, New York State Organized Crime Task Force, December 1989.

12      Id., at page 139.

13      Guidelines, § 8C2.5.

14      For example, the former U.S. Attorney for the Southern District of New York, Otto Obermaier, in announcing his decision not to criminally prosecute Treasury bond traders Salomon Brothers in 1992, described the relationship between prosecutors and corporations as a “partnership” for effectively combatting corporate crime.  The Guidelines, he said, embody the principle that corporations have been conscripted into the fight against corporate crime to become partners with the government.  Good corporate citizens not only prevent and detect crime within their ranks, but report illegal activities to the government and co-operate with its investigation. See “Drafting Companies to Fight Crime”, New York Times, May 24, 1992, F11. Salomon repeatedly submitted false bids in auctions for U.S. Treasury securities  –  thus illegally acquiring $9.5 billion of Treasury securities  –  created false books and records in connection with the false bidding, and engaged in pre-arranged trades in U.S. Treasury Securities with other firms to create the appearance of false tax losses amounting to $168 million.  In S.E.C. v. Salomon Inc. and Salomon Brothers Inc., Salomon agreed to pay $290 million in civil penalties and forfeitures (S.E.C. Litigation Release No. 13246/May 20 1992).  In announcing the settlement, the government placed particular emphasis on Salomon’s cooperation with the investigation and what might be termed its “corporate remorse”.  The SEC noted, in its Litigation Release, that it took into account “the change in management which occurred at Salomon in August of 1991, the new policies and procedures adopted by the firm at that time, the ethical climate mandated at that time by senior management and the cooperation of Salomon with the Commission during the investigation.”   In 1993 the U.S. Attorney for the Southern District of New York, Mary Jo White, made a similar determination in her decision not to prosecute Sequa Corp. for criminal violations involving fraud in the manufacture and repair of airplane engine parts, citing Sequa’s co-operation with the government’s and the FAA’s investigation and the negative impact of criminal charges on innocent shareholders, employees and others. Press Release, U.S. Attorney’s Office, SDNY, June 24, 1993.  The Guidelines also provide for downward departures in sentence where the convicted organization is a public entity: §8C4.7