Charles Rosen, Efrain Gonzalez Jr. and Brian McLaughlin, a trio of indicted embezzlers, may not know it – or care – but the thefts of public, nonprofit and union money of which they were accused in recent years has sparked a city effort to keep nonprofit leaders' noses clean.

The city's not just going after those suspected of similar alleged six- and seven-figure thefts, with more than 30 nonprofits that contract with the city now under scrutiny by the Department of Investigation. It's also mounting a separate effort to curtail financial mismanagement. In months to come, a detailed questionnaire will be landing in the offices of hundreds of nonprofits that hold significant public contracts in human services, requiring leaders to engage in a self-reporting exercise that should expose financial control flaws to themselves – and the Mayor's Office of Contract Services – well before any attention from investigators is necessary.
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With nearly a quarter of the city's $15.7 billion procurement budget going toward human services contracting last fiscal year, officials say they're working to make sure public money isn't intentionally flowing into swimming pools for executive directors, say – or accidentally trickling in directions that are improper, if not criminal. Should the efforts – one preventive, one punitive – prove successful, say Mayor's Office of Contract Services Director Marla Simpson and Department of Investigation Commissioner Rose Gill Hearn, both New York City residents and nonprofit contractors will benefit. The nonprofits should emerge better governed, financially stronger – and more aware of potential criminal consequences of money mismanagement – as well as more efficient at delivering social services over the spectrum from the bassinet to seniors' bingo.

The Rosen, Gonzalez and McLaughlin cases, all of which DOI investigated, convinced Gill Hearn by 2005 of the need for a new Nonprofit Vendor Fraud Unit, which by last year was staffed with a handful of experienced accountants, forensic auditors and white-collar crime investigators. DOI Associate Commissioner Richard Krause, a former financial fraud investigator in the U.S. Attorney's Office for the Southern District, and Chief Investigative Auditor Ivette Morales, a former financial services manager at Kroll, head up the unit, with help from – among others – the city’s inspector general for social services, Pat Russo, who served as state welfare deputy inspector general under Gov. George Pataki. (Each of the 45 city agencies has an inspector general keeping watch.) "I began to see a little bit of a pattern, or not an isolated situation, of the misuse and personal use of government-funded not-for-profit money," Gill Hearn said in an interview. "Nobody is really watching [nonprofits] very closely because they're not city agencies themselves."

Indeed, the case of Charles Rosen – a DOI investigation into fraud at the Gloria Wise Boys and Girls Club in the Bronx, of which he was executive director – resulted in DOI including recommendations for better nonprofit internal governance in its Sept. 2006 findings report, which also announced that through a negotiated settlement the city would be reimbursed for $625,000 that was stolen or misused. Meanwhile, State Sen. Efrain Gonzalez Jr., a Bronx Democrat, was indicted in 2006 on federal corruption charges (but hasn't yet been tried) for stealing more than $400,000 in state money – a case that DOI pursued after receiving a complaint, eventually finding that funds for Gonzalez’ West Bronx Neighborhood Association were being appropriated for personal uses. And former Assemblyman Brian McLaughlin, a Queens Democrat and former president of the New York City Central Labor Council who was indicted for stealing more than $2 million from the state, unions and other organizations, pleaded guilty last week to racketeering and making false statements. DOI was a primary player in that investigation from its beginning.

Gill Hearn doesn't know whether there's more fraud taking place in nonprofits today than in the past – but she is convinced it's enough to merit the extra focus. Although some of the current 30 to 40 open cases may dry up without substantiation, she says, in others it's looking like public dollars have been pilfered to the tune of six and seven figures. And who's coming under the microscope? "Definitely a lot of youth program activity – after school, day care and other youth programs," she said, as well as nonprofit organizations dealing with substance abuse counseling, foster care, seniors' care and mental health. Some are small grassroots groups, others are medium-sized or well established. Some are aware of the investigations; others are not.

"We're going after cases where something systemic is going on," Gill Hearn said. "What we're seeing is outright misappropriation of funds, backed up by falsified invoices." There are excessive salaries and benefits, cars, expense accounts, nepotism, no-show or low-show jobs, and self-dealing – meaning that, for example, a board member is paid for providing goods or services without full disclosure and approval. "I think 2008 is going to be a year where you do see a number of these cases come to fruition."

DOI operates differently than a prosecutor, though. Gill Hearn is quick to point out that her department is a city agency just like those hiring the contractors, and she'll sometimes alert other agency heads of apparent problems before an investigation is concluded, if it could improve actual service delivery to city residents.

The Gloria Wise case also was catalyst for creation of the Capacity Building and Oversight unit in the Mayor's Office of Contract Services (MOCS) says assistant director for CBO Jenny Walty. Freshly minted this fall by MOCS chief Simpson, CBO is launching a "Not-for-Profit Vendor Review Program" to learn more about nonprofits' financial practices – and tighten them up where needed. Of the 800 nonprofit vendors holding human services contracts worth at least $1 million (in aggregate, if not alone), 50 will soon receive a four-page questionnaire asking questions about financial controls, board structure and governance, and executive compensation. The four-page Not-for-Profit Vendor Review Report also asks for 15 attachments, such as audited financial statements, bylaws and an organizational chart.
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The way nonprofits operate and are used by the city “runs on an assumption of strong internal oversight, internal controls,” says Simpson. Although the recommendations DOI made in the Gloria Wise Girls and Boys Club case report were helpful, they were "not necessarily a complete blueprint for what we thought needed to happen with the sector," she said.

Simpson also notes that on the city’s side, too, changes are being made to help nonprofits – such as registering contracts and making payments in a more timely fashion, so organizations don’t run into cash-flow issues that can lead to trouble. MOCS also has expanded eligibility for the interest-free loan program. "By cleaning up what the city's doing, we can strengthen not-for-profits," she said.

The nonprofits represented by the large board of directors of the Human Services Council – an umbrella group calling itself "the voice of the human services community" – were the very first group to fill out the questionnaires, providing feedback to CBO before others are queried. That input led to some modification of the “Review Report” – and a few realizations by respondents too, Walty said. The second batch of questionnaires will go out this month, she said; because it takes hours to examine one organization’s response, the whole project of gettting responses from all 800 nonprofits may take a few years.

“It’s that kind of really detailed and individualized look that will allow us to make an assessment so we can really see where their needs are,” says Walty.

Some on the receiving end chafe at these new reporting requirements, however. "It's not my understanding that Gloria Wise was unearthed through any kind of form," quips Fran Barrett, executive director and founder of the Community Resource Exchange, which offers consulting services to nonprofits.

The idea of outright corruption "is a non-starter in our world," says Barrett, who received the query early as part of the test group. Over the Exchange's nearly three decades in operation, "I can think of one or two organizations in that time where something was questioned in a substantial way. ... There's a high level of accountability in nonprofits now." And no one welcomes more paperwork, she said.

Staring down the questionnaire, with queries like, "Is board approval required for opening/closing bank accounts?" and "Has the organization forgiven or written-off any loans in the past 12 months?" Community Resource Exchange senior fellow Barbara Turk also was skeptical. "This is a strategy that relies on self-disclosure of corruption, and that seems counter-intuitive," said Turk.

Human Services Council Executive Director Michael Stoller, whose board served as test drivers, isn’t thrilled about the additional paperwork either, but said he’s still grateful the Bloomberg administration seems more sensitive to nonprofits' needs than previous mayors. Stoller wishes "we could find that one chunk of paperwork that everyone could be happy with." But he's not sure that the new oversight efforts are overreactions.

"How can you know?" he asks. "I'd like to think people in this sector are doing God's work, and doing it the way God would want. Obviously that isn't always true."

Simpson maintains the reporting isn't so onerous, saying "it's still all paper that already exists." Her hope is that "organizations will self-identify things they can do that will make them better prepared." And no, MOCS hasn't pointed DOI investigators in the direction of any particular group.

Their missions do overlap, however. DOI staff has provided advice for the vendor review, says Walty, especially on how to examine financial documents and look for red flags. And DOI Commissioner Gill Hearn says her intention is to help keep nonprofits ship-shape, in addition to busting them when they’re not. "While DOI investigates allegations of wrongdoing and malfeasance in city-funded not-for-profits, it also identifies problems within these organizations and offers ways to fix them so much-needed services can continue,” she said.

Meanwhile, the contract office is looking to help nonprofits in other ways, too. Classes at its Procurement Training Institute are ongoing. Simpson's team has plans to create a template of standard contract language for human services contractors – something already in use for construction contractors. And they’re considering setting up a new group buying program for big-ticket items like fuel, insurance, paper supplies and computers.

"I think we believe that these measures make organizations more effective programmatically," says Simpson. "It's like a physical. There's no way to know what we save, because the whole thing is a preventive exercise."

- Karen Loew