Construction Management

5 Shocking Commercial Construction Fraud Stories

Published by in Construction Management

Commercial construction isn’t an easy field to be in.

Though the sector has beaten growth forecasts over the past five years, it’s still incredibly challenging for construction companies to complete their projects on time, on budget, and of high quality.

Sometimes, the industry’s pressures — from  zoning restrictions to the rising cost of materials — drive even the best commercial construction companies to swindle their clients.

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Unfortunately, these commercial construction fraud stories are all too common. Below, I’ve outlined some of the most egregious in the world from the past year.

Hunter Roberts Scams Schools in New York

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Hunter Roberts Construction Group (HRGC) is one of the bigger New York-based construction companies, responsible for famous buildings like BMW of Manhattan, AVON headquarters, and the parking lots for Yankee Stadium. HRCG’s company code of ethics includes, “It is our integrity that makes us a leader in the construction industry and a trusted partner to our clients. We remain steadfast in adhering to our commitments, displaying honesty and integrity and reaching company goals solely through honorable conduct.”

Unfortunately, Hunter Roberts did not follow through on that code when working on a charter school, the Queens Hospital Center, or even while rebuilding the Fiterman Hall at the Borough of Manhattan Community College after it was damaged on September 11th.

Most construction companies are familiar with the term “foremen’s pay;” it’s the idea that construction companies will fluff their contractors’ time sheets for a little extra money for a job.

This practice is common in the construction industry and often doesn’t result in more than a few over-reported hours. But in the Hunter Roberts case, The New York Times reports that the self-tipping went far beyond what is “normal.” Stephanie Clifford reports,

Hunter Roberts inflated the bills by altering labor foremen’s time sheets, according to the agreement. The scheme… [is] part of the way companies keep the loyalty of their top supervisors. Had Hunter Roberts made the extra payments itself, it would have been legal, but instead, it billed clients for work that did not occur.

The additions were mostly small — an hour of overtime here, another two hours there. One foreman got ‘four hours of guaranteed overtime per day, whether worked or not.’ When labor foremen went on vacation or took a sick day, Hunter Roberts would falsely report that the workers had showed up on the job. It also paid a group of labor foremen, and one carpenter foreman, more than the contracts with clients specified, without getting the clients’ approval.

The company ended up shelling out $7 million for the faulty timesheets. Was it really worth it?

Inspectors Accept Bribes to Pass Unsafe Buildings

Via NY Times

Via NY Times

What happens when New York Mayor de Blasio launches an aggressive affordable housing plan (aggressive meaning around 50,000 new apartments in New York City by 2024)?

Contractors start to rush on the job and bribe building inspectors to the tune of $450,000.

Inspectors can make or break building; one inspection rejection can force construction to crash into a halt “until further notice,” costing construction companies and their clients time and extraneous amounts of money.

(That’s why many construction managers invest in construction management software like SiteMAX, Intelex, and Latista to avoid unforeseen safety inspection issues.)

In this particular case the New York Buildings Department approved buildings made for low-income families. The inspectors largely received gifts for their approval, including a Nissan Rogue SUV and a GMC Terrain SUV, child tuition payments, and cruises.

Like a campy crime movie, investigators relied on wiretapping and other forms of surveillance. The Department of Investigation found that these inspectors were frequently not just involved in this bribery scheme, but also had formal ties to the Bonanno crime family. Other bribe takers were found  harboring cocaine and illegal guns.

To put this all into perspective, New York spent around $33 billion on city construction in 2014. Of those homes built under these inspectors’ “supervision,” the Department of Buildings Commissioner Rick Chandler has said all the “tainted” buildings were re-inspected and deemed safe or stopped production and shut down.

The Mafia Takes Over Montreal’s Buildings

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In the French-speaking province of Canada, the mob is hard at work.

According to The Wall Street Journal (paywall), the corruption spread up to the highest level of government. The scandal goes back fifteen years, starting with contractors bribing city officials for contracts.

While there were 263 days of hearings covering around 300 people, one testimony from cooperative construction company boss Lino Zambito captured the public imagination. He talked about how building companies, including his own, gave around 2.5% of “won” government contracts to friendly governmental officials and to the Mafia, who orchestrated many of these deals.

He told the commission (in French), “I fixed contracts. I financed political parties. I corrupted bureaucrats.”

The corruption reached all the way up to the Mayor’s office. In 2012, Mayor Gérald Tremblay resigned over allegations of illegal donations to his party (Union Montréal) for construction contracts. He had been the mayor of Montréal for over ten years.

The investigation was led by Quebec Superior Court Justice France Charbonneau over the course of four years. The corruption inquiry became known as the Charbonneau Commission. Overall, three mayors resigned and faced jail time for “gangsterism.”

China Collapses Corruption-Fueled Skyscrapers

Panoramic_View_from_Tianjin_TV_Tower_East(small)(2008-08)

What do you do when you commission three buildings — two 31-stories tall and one 35-stories tall — and the final products are buildings that are 41 stories, 58 stories, and 65 stories tall, respectively?

The Chinese Government says: knock it down.

The International Business Times reports that the developers lopped on an extra 360,000 square meters to the initial building project in Tianjin. The three buildings make up the “Waterfront Ginza” development owned by Zhao Jin, who was arrested last year because he was suspected of using his father’s influence and connections to boost his business.

(Zhao Jin’s father is also in jail for bribery and fraud. He was the former secretary general of the Communist Party Committee of Jiangsu province.)

IBT also reports that:

Chinese media said it was not yet clear whether the adjusted size of the development was approved at some point by corrupt officials, or whether the developer simply changed the plan and persuaded officials to turn a blind eye. Either way, The Paper [a Shanghai newspaper] said the case was one of “blatant corruption,” adding that the construction of such buildings in the center of one of China’s biggest cities demonstrated “jaw-dropping arrogance.”

China Times (Chinese publication) explains that there are two reasons why demolishing the buildings are the government’s only options. Firstly, there are major fire concerns. Each floor of these high-end apartments are designed to host 70 families; should there be a fire emergency, the stairwells and fire exits would not be able to usher everyone to safety in a timely manner.

Secondly, the developer changed the size of the apartment units, leading to “too high population density,” affecting community properties (aka: sewage) and tenants’ “quality of life.”

The demolition will cost Tianjin taxpayers around $10 million USD. Considering the average Chinese person makes $4,755 USD a year, citizens will be shy to commission a new project anytime soon.

Kenya Suffocates Under Lax Safety Regulations on Ventilation and Materials

NCA

Kenya’s National Construction Authority (NCA) is taking note of construction safety errors after a one-day old baby died with three other people in a collapsed six-story building and another seven people were killed in a separate collapse over the course of a month.

Voice of America reports that the NCA has shut down “500 sites since August [2014], sometimes for safety violations, sometimes because of substandard building materials.”

The inspector in charge of this investigation, Police Inspector General Samuel Arachi, says that those responsible for this shoddy workmanship may face criminal charges. He says,

For this incident, everybody who was involved in the construction, right from the engineers, the architects, the contractor and the owner — for us this is criminal negligence and it will not be condoned.

Alfred Omenya of the Technical University of Kenya believes that commercial construction companies are not the sole entities to blame. He points out that all of Nairobi’s building collapses happen in the city’s poorest areas. Structures are quickly put up without regard to health hazards, like poor ventilation and open sewer lines. He says, “Even when [regulators] are there, they are able to allow a whole lot of substandard practices, a whole lot of illegal practices, because of course they’re able to extort bribes and are not serious about doing their work.”

Other research supports Omenya’s conclusion. For example, Transparency International, an international whistleblowing not-for-profit focused on anti-corruption programs, say that the Lands Services in Kenya (which includes construction) is the second-largest source of national bribery in Kenya altogether (it accounts for 11.9% of paid bribes in the country; police bribes were number one at 43.5%).

More?

Unfortunately, there were many more commercial construction corruption stories that didn’t make this list. Which ones do you think deserve to be on it? What should be done about it? I look forward to your thoughts in the comments below!


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About the Author

Rachel Burger

Rachel Burger

Rachel is a former Capterra analyst who covered project management.

Comments

Comment by A.L.M.Ameer on

The best solution is Technical Auditing of construction. The auditing by only Financial Accountants should be stopped as the loss owing to frauds in audited Govt. constructions has reached US $ 4 Trillions per year in 2008.It is unethical (according to FIDIC) as professionals are doing duties for which they do not have the expertise.

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Comment by Beverly Jones on

Hi. I entered the construction business through education. The construction business has set up ‘education departments’ on universities worldwide. This began in the year 1946. The principle objective is the systematic syphoning of tax-payers money through phoney set up ‘university departments’ and ‘curricula’ which are in no way related to genuine education. So far, the construction business is getting away with this massive global scam. Thank you for your invitation to comment.

Comment by martin on

in the case of Kenya which I’m familiar with, it was also as a result of corrupt land officials who give out land that is not fit for construction, say near rivers, which is prone to flooding and soil erosion among other problems. the law does not allow it but corruption prevails leading to unstable buildings which are more likely to collapse. this however does not remove blame from contractors as not all the weak buildings are found near rivers.

Comment by Gursharan Singh on

It has been my experience during my over 30 years of audit experience that the while small frauds/corruption is committed by low level workers/staff the possibility of detection and thus prevention is greater due to the many comprehensive procedures which are designed by professionals and enforced by seniors.
However the main risk is from the highly placed professionals with their technical and academic qualifications who may be involved in high value frauds/corruption cases involving tens/hundreds of millions or in current times may be in billions.
The relevant enforcement authorities and/or professional organizations may have comprehensive laws and high sounding values [which include INTEGRITY-ETHICS-HONESTY-PRINCIPLES-Etc and take OATHS TO COMPLY], sadly these VALUES MAY BE MORE COSMETIC IN NATURE with little compliance.
It is a common perception that action against small timers may be instant and penalties deterrent, it is rare for any deterrent action or any of the professionals going to prison and the financial penalties being negotiated in the name of plea bargain without the offense being recorded and the penalty sum being less than the fraud/corruption benefit. This may be due to the involved Professionals and the Enforcers and the Judiciary all being members of the same Clubs-Professional Organizations-Universities and being leaders and respected members within the community. As an example it was reported in the The Star Newspaper in Malaysia on 5.5.16 that a small restaurant owner in was fined RM4,000.00 for having increased the price of a local dish from RM2.50 to RM3.50 which increase was described as ‘profiteering’. On the other hand there is little information on findings/penalties of cases of suspected fraud/corruption such as a recent case involving RM107.0 million and others of similar magnitude which have been reported by the Auditor General annually for over thirty decades.
In almost all cases the status of the suspects involved was professional-titled-society leaders and thus may be said to be in the CONSULTANTS category.
A professional told me that the word CONSULTANT is a COMBINATION OF TWO WORDS:
CON and INSULT as they
CONNED THEIR CLIENTS AND ALSO INSULTED THEIR INTELLIGENCE as they did not want to expose their own stupidity and the blind trust in the integrity of the Professional who was appointed to protect the interest of the Client who had rewarded him handsomely.

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