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A recent New York Times article put the spotlight on a significant and insidious problem affecting real estate developers nationwide: construction contractor fraud.
The Manhattan District Attorney’s Office indicted dozens of contractors and companies for bilking seven development companies out of at least $5 million. Robert Baselice, a former executive with a general contracting company, allegedly ran a bid-rigging conspiracy that involved contracts totaling more than $100 million.
The Baselice scheme is the latest in a series of high-profile corruption cases that highlight the problem of operational visibility in commercial real estate development. In the last decade, criminal insiders have exploited the complexity of large projects to steal millions from unsuspecting teams. Thankfully, developers can access tools that help protect them from fraudsters’ most sophisticated scams.
Corruption in the Big Apple’s Construction Industry
New York prosecutors allege Baselice used his position as a vice president with the Rinaldi Group to obtain $7 million in bribes. The corrupt executive and two associates subverted the vendor procurement process by requiring service providers to pay for his approval. He leveraged the Rinaldi Group’s good name to convince developers to trust his suggestions for construction teams, electricians, and plumbers.
And the firms that didn’t play ball? The con man ensured they covered any cost overruns that occurred during construction.
The next phase of Baselice’s alleged scheme involved working with his co-conspirators to craft carefully inflated bids and change orders. Subsequently, he won over developers by faking outrage at expensive proposals, “negotiated” lower fees, and collected sizeable kickbacks once the invoices were paid. Baselice’s elaborate confidence scam netted him $4.2 million and his associates $2.8 million between 2013 to 2021.
The Manhattan District Attorney’s Office spent years unraveling the criminal operation, which included 24 individuals and 26 companies. The newly indicted contractors established impressive resumes before being brought to justice, working high-rise projects like the FiDi Hotel, the Hilton Club, and the citizenM Bowery Hotel.
Despite the size and scope of the Baselice investigation, it’s not the biggest corruption case to hit the New York City construction industry in recent years.
In 2018, the United States Attorney for the Southern District of New York exposed a pay-to-play construction fraud scheme involving Bloomberg. Executives from the corporation conspired with Turner Construction, a general contractor, to turn an internal office build-out project into an illegal cash cow. The criminals garnered $6 million in kickbacks by rubber-stamping invoices padded out by corrupt subcontractors.
Ironically the financial service company had been victimized by a Manhattan construction company in a similar situation a decade earlier.
In 2014, Structure Tone admitted to falsifying records and overcharging multiple corporate clients alongside various vendors from 2005 to 2009. The firm paid a record $55 million in restitution for defrauding Moody’s, Bloomberg, Bank of America, and other finance sector heavyweights.
How Developers Can Prevent Corrupt Vendors From Affecting Their Projects
Although unfortunate, it’s not surprising that the Big Apple is the site of significant real estate development fraud. The New York City Building Conference stated construction activity in Manhattan reached an all-time high of $86 billion last year, a level of activity that creates a major perverse incentive for fraudsters. However, the problem extends far beyond one city; Kroll’s 2019/2020 Global Fraud and Risk Report indicated bribery and corruption affected one-third of the construction industry players.
Moreover, the organization found that many companies within the field were uncertain about how to address the issue.
Only 51% of construction firms believe that regulations prevent criminal activity, lower than the 69% average across all industries. And only 24% believe their internal auditing systems effectively detect fraud incidents. The sector’s widespread skepticism about clamping down on bribery and corruption reflects the difficulty of recognizing concerning patterns in project development.
For example, bringing a large apartment building from concept to delivery involves hundreds of vendors. Over the course of a project’s lifecycle, those contractors generate a mountain of proposals, contracts, change orders, and lien waivers. Keeping track of all that information for payment and reporting purposes is challenging enough, let alone monitoring the performance of individual contractors.
Indeed, Northspyre has had extensive experience helping firms manage their project information over the last six years. We processed over 120,000 invoices for our clients in 2022 alone. If our customers entered that much data manually, the process would’ve taken six years. And that doesn’t account for all the time it would take to sift through an ocean of data to find and validate a potentially concerning performance trend.
With that in mind, it’s easy to understand why bid-rigging scams are a pernicious problem. Identifying concerning vendor behavior – like making low bids to win contracts and following them with pricey and frequent change orders - can be very labor intensive. In today’s unstable economic environment, firms don’t have the time or resources to conduct forensic audits before awarding new contracts.
Thankfully, real estate developers can protect their projects from construction vendor fraud with data analytics.
Modern intelligence platforms can automatically capture and index all project-related documentation in a centralized database. That functionality lets teams pull up, review, and compare vendors' past documents at a moment’s notice. And the A.I. powering these platforms allows leads to see the long-term budgetary impact of individual change orders.
Kroll argued that enhanced visibility enables real estate teams to “identify patterns of corruption early on” and bolster risk mitigation.
Ultimately, fraud is an ongoing threat in every sector, and malicious operators with industry experience can be especially destructive. But development teams can utilize advanced tools to protect their projects, investors, and reputations from being victimized by high-level con artists.
Want to know more about how deceptive vendor pricing affects the real estate industry? Download our 2023 Project Managers Survey to see how the practice disrupts budgeting and scheduling across the country.
Tag(s): Real Estate Development
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