Crony Contracting | Nonprofit Fraud Blog

Reposted from the This Week in Nonprofit Fraud Blog – June 2, 2014

Crony Contracting
United Neighborhood Organization of Chicago

Photo courtesy of Chicagotribune.com

June 2, 2014: The United Neighborhood Organization of Chicago (UNO), a nonprofit which operates 13 charter schools, has settled a U.S. Securities and Exchange Commission (SEC) complaint that they failed to disclose $11 million in school construction contracts granted to a company owned and operated by the brother of a Senior Vice President. The contracts were approved solely by Juan Rangel, the well-connected CEO of the organization, who had previously served as co-chair of Chicago Mayor Rahm Emanuel’s mayoral campaign. In 2009, UNO was awarded nearly $100 million in state grants to finance the construction of new charter schools. The grant agreement included a requirement that they disclose any business dealings that could be deemed potential conflicts of interest, which they failed to follow. Further complicating matters (and driving SEC’s complaint), UNO sold $37.5 million in debt to private bond investors in 2011 with state backing, also failing to disclose the conflict of interest and the associated potential financial impact of this contract, thus deceiving investors and placing the organization’s ability to repay the bonds at risk. UNO’s settlement with the SEC includes a promise to discontinue any crony contracting and adds oversight by a federal monitor who will approve all contracts for one year. The investigation is ongoing and further charges, are possible, including charges against the individuals involved.

See more on this case at: The Chicago Tribune

Lessons Learned

  • Certainly, there are benefits to having a “well-connected” CEO, but it can easily raise the specter of corruption. Indeed, in this case, the CEO had sole authority to approve contractors, which resulted in a clear violation of UNO’s conflict of interest requirements.
  • In this instance, the name of the contracting company matched the last name of an executive within the organization, which should have raised red flags.
  • The fallout from a conflict of interest can be massive. Not only did UNO face SEC penalties because of their public bond issuance, they are seeing grant funding revoked, and they face a public relations nightmare.

Raffa Forensic Practice Tips:

  •  Formal contract bidding procedures that include multiple procurement staff members and formal evaluations reduce the risk of a conflict of interest by eliminating sole oversight of the process.
  • Does your organization have a formal procurement process in place with competitive bidding?
  • Does your organization have a clear conflict of interest policy for employees and a due diligence process to check for conflicts on new vendors?

DON’T BE THE NEXT VICTIM OF FRAUD!

The Raffa Forensic Accounting Services Practice offers a wide variety of fraud prevention and detection services including Fraud Risk Assessments, Background and Workplace Investigations, Fraud and Internal Investigations, Transactional Due Diligence Investigations, Anti-Fraud Consulting and Training, and Computer Forensic Analysis.

For more information on the Raffa Forensic Accounting Services Practice please visit us at www.raffa.com/ProfessionalServices/Forensic/ and the Nonprofit Fraud Prevention Institute at www.raffa.com/Fraud.

You can also contact the following Raffa professionals with any questions or if your organization needs assistance in fraud prevention:

Lawrence J. Hoffman, CPA/CFF, CVA, CFE, Senior Partner:  Lhoffman@raffa.com
Leslie C. Kirsch, CFE, Manager:  Lkirsch@raffa.com

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