HOW TO WASTE, ABUSE AND MAYBE EVEN DEFRAUD UNION FUNDS

We are not talking about what everyone would consider outright theft, e.g., reimbursing a dummy company for fictional services and shipping the money to the Caymans. We are not even thinking about excesses that seem sleazy, e.g., the union president buying a Bentley rather than Ford Fusion as his union car or renting office space overlooking the ocean in the Florida Keys as the union’s “winter headquarters.”  Our focus here is on the type of things that a union president can get away with when the local leaders have a Madoff mindset? What is it?  It is one where the president’s general image is so high that the local voting delegates conclude s/he can do no wrong at any time or anywhere. They dismiss any suggestion of restraints or checks and balances on the president’s power not only unnecessary drags on the president’s greatness, but insulting. In its purest form, this mindset leads delegates to reflexively surround, serve and surrender to the president’s will in the same fashion bees in a hive do their queen. And that is when waste, abuse and worse at the top are so easy.  Here are just a few ways unrestrained or unchecked union presidents can use member dues for their own personal convenience at a level every bit as enjoyable as that Bentley parked at the surf-side winter HQ.

1-         They can hire private investigators to build cases against a campaign rival or political obstacle within the union.  A good example came up in a case known as Guzman v. Bevona, 90 F.3d 641 (1996) where the union president had a former officer and staffer placed “under surveillance to determine whether his criticism of the Union and defendants was fueled by anti-Union management.”  The court gave Guzman $100,000 in damages for the harm done his free speech rights and ordered the union officer that made the decision to repay the union treasury the cost of the private investigators.

Unless someone with the independence and ethics is inside the union’s financial system, these secret investigations are very hard to find.  All the president needs do is hire a private law firm to do the work.  The Department of Labor only requires the union to declare that the firm was hired to perform “Legal Services.” If anyone comes asking what the services were, the firm can hide behind the attorney-client privilege, thereby protecting the president.

2-         Another reason voting delegates and even national board members never hear about these private investigations is due to a second unchecked financial flexibility the president has with a Madoff mindset electorate. If the targeted employee learns of what is going on, the president can simply pay him/her off to keep his mouth shut about abuses.  It is quite easy to hide six and seven figure pay-offs by stretching them over a number of years, calling them fees for unnamed services provided, or even conveying them via non-cash benefits. Each method must be reported on the annual LM report to DOL, but few Madoff mindset delegates who already think the president’s “sweat don’t never stink” are going to page through those voluminous docs to spot the payments.

And if you are thinking that once the president sends the payoff that the victim is free to blow the whistle, do not be naïve. These deals usually come with confidentiality clauses that permit the union to harass and financially cripple the victim if s/he reveals any details about the deal. Not even the union’s executive board can get details of these under the standard confidentiality clause, absent a full blown investigation.

3-         A third large chunk of discretion most presidents have is to pay staff “bonuses” that were never mentioned when the national executive board approved the projected salaries for the coming year. These bonuses can certainly be linked to performance, but they can also be paid just for “acts of loyalty” that do nothing for the members, although lots for the national president personally. They can also be tucked away in certain kinds of deferred compensation arrangements that need not be labeled retirement plans in annual IRS or DOL reports, or even in the approval of inordinate business expenses, e.g., trips, reimbursement of home internet access, computer equipment, etc.. Check out Teamsters, Chauffeurs, Warehousemen and Helpers v. Greenwalt, 919 F. Supp 774 (1996).

4-         Number four is the ability to contract with or hire friends or others who might be inclined to repay the favor in a myriad of ways rather than run a competitive process.

5-         Number five would be the middle man technique.  For example, suppose the union has several offices around the country for which it pays rent. That rent could be sent directly to the landlords or it could be sent to a “management company” conveniently created as a compensated pass-through operation to pay the rent. The national president with the power to decide those things unilaterally does not have to own or even be a current associate of that middle man venture to benefit.

6-         Number six would be an unmonitored expense account for the national president.  Admittedly, DOL requires the president to report the total figure annually on the LM report and IRS gets a glimpse of that as well through the annual 990 filing.  But neither of them nor anyone else with independent authority gets the details unless the voting delegates modify the Constitution and Bylaws to require such things as an itemized report to the executive board of what the money was spent on.  For example, was a big chunk spent traveling to the same local or city repeatedly throughout the year, which suggests some continuing interest in something or someone there? Or was it spent buying repeated dinners and drinks for important delegates in an upcoming election?

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Fortunately, among those unions that organize federal employees almost all have Constitutional rules in place that greatly reduce the chances for waste and abuse by the top guy. There are many easily administered available ones.  If you want to assess how well your union is protected  check out AFGE.  It does a very good job via its Constitution & Bylaws ensuring that member dues are spent on the needs of members rather than items only distantly connected to the good of the union—it at all.  Here is a partial list of the ways they fend of waste, abuse and even worse at the national leadership level.

• The annual budget developed for the board is developed by a committee rather than the national president alone.  The National Secretary-Treasurer is on the committee and all members must be approved by the board. (Art. IX) Budgets are a great place to hide spending flexibility when only one person prepares them.
• It elects a National Secretary-Treasurer independent of the National President who is given the authority to make investment decisions, disburse the money, etc, while also submitting a quarterly report to the executive board members of staff salaries, maintenance [costs] of Headquarters, travel, and miscellaneous expenditures. Such information is to be itemized by Headquarters department and NVP district and program function expenditures. (Art. X) The more the spending is broken down by program the greater the chance of spotting waste early.
• The National Secretary-Treasurer (NST) has the authority to “appoint, direct, and have supervision of all employees of the Federation employed in the office of the NST, such action to be subject to the approval of the NEC,” which is the name for the AFGE national executive board. (Art. XIII) There may be no greater threat to the financial integrity of any nonprofit where the person at the top can fire everyone who has access to the details of how the money is spent.
• The National President is required to “travel under budget and general policies of the NEC” rather than at his own discretion. (Art. IX)
• Any staff who want to run for elected AFGE office must take a leave of absence to prevent even the potential of AFGE funds being used to subsidize his/her campaign travel, delegate dinner purchases, etc.
• The salary of the National President is stated clearly in the Constitution so that anyone looking at an end of year spending report can assess whether it is proper. AFGE pays its National President at the GS-15 level, dispensing with the need for anyone to search through historical records to find out just what was legally authorized by prior conventions.

Frankly, if we had our way unions would be rated by how financially secure they are—somewhat like the Internet’s “https” URL prefix certifies that a site is secure enough to share money and financial information with. That would not only help employees select unions during organizing drives, but reward the secure unions for attaining such a certification. In the meantime, you might want to check your union’s anti-Madoff protections against the AFGE features to see how you measure up.

Whether you read one of the books about the Madoff scandal, watch the made for TV movie, or sit through the documentary one thing is easy to spot.  The people who trusted him were so gullible and failed to even basic precautions or interpret obvious signs. It is not as if the signs were even hidden well, as Harry Markopolos, an outside accountant, showed when he spotted the scheme years before Madoff gave up and any of the government oversight agencies suspected a thing. While it is tempting to say that the victims deserve what they got, the scheme hurt a lot of folks with no connection to Madoff whatsoever. And that is our point. Washington has a history of taking the infractions of a couple of unions or even just one, whipping up a media frenzy around it and then coming down hard on many more unions. Federal sector unions are especially vulnerable given that an argument can be made that those dollars passing through their treasuries are federal tax dollars. Consequently, all union voting delegates should think defensively about protecting their national treasury.

BTW, any connection between this posting and a particular person or union is unintended, purely coincidental, and perhaps even a sign of paranoia. Based on what we know about the current top leaders of the major federal sector unions they are all honorable folks. Not one has the personality of what we would call a Sun King leader reminiscent of some French kings who thought the universe revolved around them rather than the people they led.