Recently, I was reading about the FBI’s investigation into AFB Construction, a Connecticut construction company which is the facilities manager for the Stamford school district. The substance of the investigation is whether AFB used its position within the Stamford school district to obtain business with another city contractor.
The article got me thinking about Cuddy & Feder’s developer and construction clients (and developers and construction companies working in the Westchester/Fairfield area generally). Like all companies, developers/construction companies would rather spend money on their core business than pay attorneys or compliance professionals to mitigate potential risk. While they recognize the need to invest money in counsel with respect to land use matters – the type of work that is necessary to achieve the permits, variances, and other permissions required to build/develop/sell and ultimately generate revenue – they may be hesitant to incur legal fees beyond that, relying instead upon employing ethical business practices in order to avoid regulatory or legal troubles. This approach is attractive, but dangerous, particularly in light of the current business climate.
In 2012, Bovis Lend Lease, the U.S. subsidiary of an Australian construction company, entered into a deferred prosecution agreement with the United States Attorneys’ Office (USAO) for the Eastern District of New York. Under the agreement, Bovis was fined $56 million and in a separate proceeding its former president was sentenced to 10 years in prison (the sentence was later suspended). Small or mid-sized developers might be tempted to dismiss this as an instance of a corrupt, massive organization, which has little bearing on them, but it is important to understand the basis for the USAO’s case.
The allegations were that Bovis paid union foremen (not company employees) for some overtime and holiday hours that they did not work, passing that cost along to clients, and that it did not accurately report its use of women’s/minority/disabled owned business entities (W/M/DBE) as subcontractors.
While most of the companies working in and around Westchester or Fairfield counties are not the size or scope of Bovis, they should still take note of the hefty penalty imposed in a case where there were not even allegations that the company illegally profited or took extra money for itself. Similarly, the allegations in the AFB matter are far from what we would typically think of as what constitutes institutional corruption.
It is not only criminal investigations by the US Attorneys’ or FBI with which construction companies and developers need to concern themselves. These companies may also find that they are on the receiving end of inquires from states’ Attorney Generals, school or city construction authorities, or other agencies such as the Federal Housing Finance Agency. Accordingly, developers/construction companies of all sizes must have compliance procedures in place and know what to do if and when they do receive a regulatory or prosecutorial inquiry.
First, developers/construction companies need to implement robust compliance procedures. For most small or mid-sized companies it will not be cost-effective to have a full-time employee dedicated to compliance, therefore these companies should look to engage outside counsel or compliance consultants to implement policies specific to their businesses. These policies should include, among other things:
- Document retention policies
- Procurement practices (with extra controls in place for public projects)
- Subcontractor selection and billing practices
- M/W/DBE reporting (depending on the jurisdiction in which the company operates)
- Timekeeping practices for both company and union employees
These policies benefit a company by not only mitigating risk, but they also demonstrate good faith to regulators/prosecutors if the company ever is investigated.
Second, if a developer/construction company receives a regulatory inquiry, it should consult with an attorney with experience in the area of regulatory investigations. It is difficult to stress how critical this is, even for a company that may not be the target of the investigation. In addition to retaining an attorney to assist in responding to the inquiry, companies should:
- Retain all documents relevant to the subject of the inquiry
- Not make any public statements about the substance of the inquiry
- Not take an adversarial position towards the regulators/investigators
Compliance is not an added cost for developers and construction companies, it is a necessity and should be viewed as an opportunity to put in place procedures that will protect the company, mitigating risk and saving money, stress, and distractions in the future.