What Does It Mean to be a Monitor? (Revisited)

by Daniel R. Alonso

In a post on this site last fall, Prof. Veronica Root asked “What Does It Mean to be a Monitor?”[1] The point of her piece was to explain how the term “monitor” describes a number of activities and assignments that can be quite different from one another. Prof. Root’s post faithfully described different monitorship models, from court-ordered monitorships to corporate compliance monitorships. But the otherwise excellent post did not touch on a key piece of the monitorship puzzle—proactive monitorships, created in the absence of an action or settlement as a prophylactic against wrongdoing—without which any discussion of monitorships is incomplete.

Proactive monitors, sometimes called “integrity monitors” or in some contexts “independent private sector inspectors general,” play an important and growing role in the world of monitorships. A recent high-profile example is New York Times reporter Andrew Ross Sorkin’s open letter to President-elect Donald Trump, in which he suggested that if Mr. Trump did not place his assets in a blind trust, one way for him to ease concerns about potential conflicts of interest posed by his business empire would be to engage a corporate monitor to examine and report on such conflicts.[2] Such a monitor would, of course, have to be “truly independent.”[3]

Although Mr. Trump opted instead to personally appoint an “ethics adviser” who will evaluate and have the right to approve or disapprove transactions by the Trump Organization according to a yet-to-be-defined set of standards,[4] the suggestion of a Trump monitor highlights the kind of important matter that can benefit from a proactive monitor. But what exactly is a proactive monitor? Like remedial monitors, proactive monitors operate independently and draw from the expertise of professionals from across multiple disciplines, including legal, accounting, investigations, and audit. But as the name suggests, proactive monitors are not engaged pursuant to a court-ordered or other settlement agreement, or voluntarily in response to the discovery of past wrongdoing (the latter type termed “public relations monitorships” by Prof. Root). Rather, they are generally engaged to prevent and detect the occurrence of fraud, waste, and other forms of unethical behavior in the first instance.

Proactive monitors were first used in the early 1990’s for the oversight of public sector construction projects in the New York metropolitan area, where the large scale and complexity of these projects make misconduct difficult to root out.[5] Long experience in New York had taught that any such project was bound to be plagued by problems as diverse as overbilling, bid rigging, labor kickbacks, prevailing wage violations, or no-show jobs, to name a few. Injecting an on-site monitor into the project, with access to its full scope, serves a deterrent function, and enables more effective and earlier discovery of wrongdoing.

Proactive monitors have since been regularly employed, including in huge undertakings like the clean-up and rebuilding of the World Trade Center[6] and reconstruction efforts in the aftermath of Super Storm Sandy.[7] The World Trade Center clean-up, performed under risky “time and materials” contracts, caused officials great concerned about fraud and organized crime influence at a time when the whole world was watching. The solution was to require each of four prime contractors on site to hire a proactive monitor selected by the city’s Department of Investigation (DOI).[8] The result: a program deemed “an overwhelming success” by the House Subcommittee on Management, Integration and Oversight of the Committee on Homeland Security, having recovered $47 million in overbilling.[9]

Since their introduction, proactive monitorships have expanded outside of the New York area and to different industries. For instance, waste management companies have hired monitors to provide comfort to investors prior to seeking funding,[10] and in at least one case a private equity firm engaged a monitor to allay its limited partners’ concerns about the fees it charged.[11] And in recent years the Federal Communications Commission has approved mergers subject to the oversight of proactive monitors (termed “independent compliance officers”), who are tasked with ensuring that the post-merger companies adhere to the public-interest conditions imposed as part of the FCC’s approvals.[12] Recognizing the value of the model for public works projects, in 2013 New Jersey enacted The Integrity Oversight Monitor Act, which requires state agencies to retain integrity monitors to oversee contracts for rebuilding and recovery projects over a certain dollar threshold.[13] Whether in industries that have historically been vulnerable to corruption, such as waste hauling or construction, or in matters of widespread public interest or historical mistrust, proactive monitors seek to provide major benefits in the public interest.

These benefits can be roughly divided into three. First, the mere presence of the monitor can serve as a significant deterrent for misconduct and result in savings from criminal schemes never developed, or wasteful processes overhauled. Second, the monitor’s investigatory apparatus can, and does uncover quantifiable instances of cost savings. For example, the New York City DOI employed an integrity monitor in 2014 to oversee repairs by contractors of over 13,000 residential units damaged by Super Storm Sandy. The agency estimated that the monitoring prevented potential waste and mismanagement amounting to cost savings of approximately $30 million.[14]

Finally, as in the case of the FCC monitorships, hiring a proactive monitor can produce a valuable signaling effect to an industry, thereby increasing public confidence in an organization or undertaking. A company that has merged with another before a skeptical public, or is transacting business with a partner with reputational concerns could gain credibility by engaging a proactive monitor. One can even imagine a future company like the Trump Organization, perhaps more sensitive to suggestions of ethical conflicts, accepting Mr. Sorkin’s recommendation to appoint an independent proactive monitor.

In light of their versatility and usefulness, we can expect that proactive monitors will gain increasing attention in the years to come. Therefore, it is important to understand the distinctive benefits of this monitorship model so they can be fully realized and used as a key tool in the integrity toolbox.

Footnotes

[1] Veronica Root, What Does it Mean to be a Monitor?, NYU Compliance & Enforcement Blog (Sept. 21, 2016).

[2] Andrew Ross Sorkin, Dear President-Elect Trump: Here’s How to Fix Your Conflict-of-Interest Problem, The New York Times (Nov. 28, 2016), http://www.nytimes.com/2016/11/28/business/dealbook/how-trump-could-ease-his-conflict-of-interest-problem.html.

[3] Id.

[4] Maggie Haberman, Trump Said Ready to Turn Business Over to Trust Run by Sons and Associate, The New York Times (Jan. 11, 2017), https://www.nytimes.com/2017/01/11/us/politics/trump-organization-business-conflicts.html?_r=0.

[5] See generally James B. Jacobs and Ronald Goldstock, Monitors & IPSIGS: Emergence of a New Criminal Justice Role, 43 Criminal Law Bulletin 2 (2007).

[6] See Port Authority of NY & NJ, Use of Integrity Monitors at the World Trade Center Site – Post Disaster and During Rebuilding (Oct. 10, 2007), https://www.hud.gov/offices/oig/reports/auditforum9.pdf.

[7] See The State of New Jersey, Sandy Integrity Monitor FAQ, http://www.state.nj.us/dca/divisions/dlgs/programs/lpcl_docs/Sandy%20Integrity%20Monitor%20FAQ.pdf (PDF: 42 KB).

[8] Jacobs & Goldstock, supra note 5, at 228-29.

[9] Id. at 229-30.

[10] Stanley N. Lupkin and Edgar J. Lewandowski, Independent Private Sector Inspectors General: Privately Funded Overseers of the Public Integrity, NY Litigator Journal (2005).

[11] Gretchen Morgenson, Entering the Secret Garden of Private Equity, The New York Times (Dec. 27, 2014), https://www.nytimes.com/2014/12/28/business/entering-the-secret-garden-of-private-equity.html.

[12] See, e.g., FCC Public Notice, Independent Compliance Officer Identified in Accordance with Charter-Time Warner-Bright House Merger Condition (Aug. 17, 2016); FCC Public Notice, Independent Compliance Officer Identified in Accordance with AT&T-DIRECTV Merger Condition (Oct. 23, 2015).

[13] N.J.S.A § 52:15D-2 (2013).

[14] New York City Department of Investigation, Integrity Monitor Program, http://www1.nyc.gov/site/doi/about/integrity-monitor-program.page.

Daniel R. Alonso is a Managing Director in the New York office of the global consulting firm Exiger, where he specializes in monitorships, investigations, and corporate compliance. He most recently served as Chief Assistant District Attorney in Manhattan, and previously spent nine years as an Assistant U.S. Attorney in the Eastern District of New York.

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