Top prosecutors: Nonprofit scrutiny key to fighting pol corruption

In testimony delivered Tuesday night before the Moreland Commission to Investigate Public Corruption, some of New York’s top prosecutors called for significant changes in state law to end state legislators’ bad behavior.

Some of the reforms proposed by U.S. Attorneys Preet Bharara and Loretta Lynch and Manhattan District Attorney Cyrus Vance Jr. were familiar, including calls for changes in the state constitution to prevent convicted lawmakers from drawing a publicly funded pension and an end to immunity protections for lawmakers who testify as witnesses before a grand jury.

But one new theme emerged in the proceedings: Both Lynch and Vance called for increased oversight of the nonprofit organizations that have been the nexus of numerous corruption schemes.

U.S. Attorney Loretta Lynch, shown here at a June news conference, told a state panel a dearth of information about lawmakers' outside activities hinders corruption investigations. AP Photo/John Minchillo

U.S. Attorney Loretta Lynch, shown here at a June news conference, told a state panel a dearth of information about lawmakers’ outside activities hinders corruption investigations. AP Photo/John Minchillo

Investigations by federal prosecutors have exposed, through subpoenas and wiretaps, the seedy underbelly of Albany deals exempt from disclosure under current law, and politicians’ personal relationships with nonprofit organizations receiving state funding.

At the hearing, Lynch ran though a hefty list of corruption cases won or currently being prosecuted by her Eastern District attorneys, including the successful convictions of former Senate Majority Leader Pedro Espada and State Sen. Shirley Huntley, and the cases now pending against former Senate Minority Leader John Sampson and Assemblyman William Boyland, Jr. She expressed dismay at the freedom lawmakers had to use not-for-profits to profit themselves.

The Espada and Huntley cases in particular, Lynch said, “illustrate certain weaknesses in…the oversight of nonprofit agencies.”

Huntley, a Democrat from Queens, is currently in a federal prison after being convicted of embezzling money from a charity she controlled. Espada was convicted in 2012 for embezzling more than $14 million in public money from the nonprofit Bronx healthcare clinic he founded in 1978, which he used to pay his campaign expenses and purchase expensive sushi.

“In both cases, the boards of the nonprofits were packed with cronies of the corrupt politician, and had neither the expertise to run the organizations nor the will to override their political patron, Lynch said. “The audit function was so lacking as to be virtually nonexistent.”

Espada’s control over the Soundview clinic presented “extraordinary challenges in building a case” against him, Lynch said, because employees dependent on Espada for their livelihoods often refused to cooperate with federal prosecutors.

Required audits done in cursory fashion and complicit nonprofit board members or employees like those seen in the Espada and Huntley cases are far from outliers, Lynch said, but rather routine issues among not-for-profits involved in public corruption cases.

Another issue has been groups granting funds and business to politicians in exchange for favorable treatment. Prosecutors have accused former Sen. William Boyland of, among much else, extracting a sham consulting job with the hospital nonprofit Medisys, while securing state grants for the hospital. Sen. Carl Kruger, now in prison, had a similar arrangement between Medisys and a consulting firm where he was a partner.

The state Attorney General oversees nonprofit organizations, which must register with that office, but has limited resources to audit New York’s thousands of nonprofit organizations. Boyland’s association with MediSys was first made public in a newspaper article in 2008, but the Brooklyn lawmaker was not required to disclose that income to the state until 2013, when the state Joint Commission on Public Ethics first began to require Albany lawmakers and their spouses to disclose income from outside business. Some information is still secret. Nonprofits that employ politicians’ other business associates or relatives who aren’t their spouses still do not have to be disclosed. And lawmakers aren’t required to reveal consulting firm or legal clients.

This year, the Legislature passed a bill that would beef up fraud protections among state nonprofits by allowing increased scrutiny by the AG of transactions between nonprofits’ employees and entities they own. The bill would also require officers, directors and other key employees to disclose their own personal interests in organizations’ financial transactions and would mandate whistleblower policies for nonprofits with more than $1 million in revenue. The bill, authored by state Attorney General Eric Schneiderman, has not yet reached Gov. Andrew Cuomo’s desk, a spokesman for the governor said.

Some nonprofit watchdogs suggest that New York needs to wall off lawmakers from management roles in organizations. “The notion that politicians or their staff or their family members can be involved in directing nonprofits which are beneficiaries of government action is dubious at best in terms of accountability,” said Rick Cohen, a national correspondent at Nonprofit Quarterly.

Nonprofits are supposed to hire independent auditors to certify their tax returns, but that safeguard isn’t foolproof against corrupt elected officials, Lynch testified. Auditors are sometimes unfamiliar with the way the nonprofit works or are easily misled by politicians. Paid employees at a nonprofit, she said, are especially vulnerable to pressure from lawmakers or board members seeking to keep information about the organization’s finances secret.

In an interview following his testimony, DA Vance agreed with Lynch’s call for more nonprofit oversight. “I think that’s proven to be a vulnerable area in terms of fraud,” he said, calling for increased law enforcement oversight to avoid “the possibility that relatives or friends can benefit” from politicians’ grants to nonprofit organizations.

The case against Huntley involved member items, a process through which state lawmakers were able to give earmarked funding to charities in their district and beyond. Gov. Cuomo moved to eliminate the member-items system in 2011, but the New York City Council still practices this type of grant-giving, with yearly discretionary funds doled out according to the preferences of the Council’s powerful Speaker.

Even with curbs on member items at the state level, lawmakers still exert influence over how grants are disbursed. One example: In the federal complaint charging State Senator Malcolm Smith with bribery the senator can be overheard on a wiretap talking about freely available grant funds: “Multi-modal money is outside the budget and it’s always around.”

The methodology for giving out grants is an opaque process the Moreland Commission can illuminate, said Bill Mahoney, an analyst with the New York Public Interest Research Group.

“There are no formal member items any more, but it does seem like legislators continue to have some role in the distribution of funds,” Mahoney said. “There are tons of photographs of legislators handing out oversize checks to community groups,” he said.

Mahoney said he suspected lawmakers used their positions as leaders on various legislative committees to influence state agencies deciding how to disburse grants, a vague process the Moreland Commission is expected to investigate.

“There’s a lot that goes on that’s perfectly legal. What the Moreland Commission can do is paint a damning portrait of how business gets done in the state capitol,” Mahoney said.

Lynch noted that a dearth of information surrounding government contracts steered by politicians helps hide corruption. “Greater oversight and transparency” of vendors doing business with the state “could yield both evidence of corruption as well as serve a deterrent effect,” Lynch said.

The temptation for lawmakers to earn outside income illegally makes the case for ending the Legislature’s part-time salary system, said Mark Peters, a partner at the law firm of Edwards Wildman, and a former chief of the New York state Commission on Public Integrity.

“If you believe that government is important and governing is important maybe it’s time we realize that a full-time Legislature could devote 100 percent of their energies to being legislators,” Peters said.

He added, “I don’t think that’s happening any time soon.”

Data Tools


Our work has appeared in…

About TNYW

The New York World focuses on producing data-driven investigative projects.