New Orleans-Style Corruption Taints Katrina Recovery

New Orleans-Style Corruption Taints Katrina Recovery

Words traditionally used to describe the view of the Mississippi River from the waterfront promenade near Café du Monde are now being used to depict the corruption arising from Hurricane Katrina recovery efforts.

“It is just breathtaking,” said U.S. Senator Susan Collins. “The blatant fraud, the audacity of the schemes, the scale of the waste.”[1]

New Orleans is almost synonymous with corruption. It is common knowledge, for instance, that police officers are intentionally underpaid because their salaries are often handsomely supplemented by bribes.

Efforts to clean up the city over the decades frequently have been met with yet more corruption. At best, such efforts are perceived as a joke. Asked how he could ensure Katrina relief money wouldn’t be squandered, Mayor Ray Nagin replied with a laugh, “You know about our colorful past?”[2]

Not even the worst natural disaster in U.S. history, which killed some 2,000 people and caused US$80 billion in damage, could shame the New Orleans establishment into doing the right thing.

Up to US$2 billion in federal assistance has been lost to fraud and waste – fully 6 percent of the aid devoted to communities struck by Hurricanes Katrina and Rita in the summer of 2005.[3]

Federal investigators have arrested more than 400 people on fraud charges. More than 250 people have been convicted. And some 22,000 reports of fraud, abuse and waste have flooded in to the federal Hurricane Fraud Hotline.[4]

“We’ve seen every type of corruption imaginable,” said federal prosecutor Jim Letten, who indicted 44 public officials in the New Orleans area within a year’s time – from judges to police officers to teachers.

A state employee was charged with handing out phony unemployment benefit cards in exchange for bribes of up to US$300. A hotel owner was charged with billing the government nearly a quarter-million dollars for hurricane victims who never stayed there. And 1,100 prison inmates collected US$10 million to help pay rent and other expenses.

“This started off as a disaster-relief program,” said U.S. Representative Michael McCaul, “but it turned into a cash cow.”[5]

Though no one has been charged with a crime, federal investigators are looking closely at a $146 million contract signed with an Atlanta-area company to provide bottled water to victims of Katrina and other disasters.

Members of Congress asked federal officials to investigate the Lipsey Mountain Spring Water Company of Norcross, Georgia, which won a 5-year contract in 2003 to be the government’s sole provider of emergency drinking water. Though the contract must be renewed annually during its term, it is a sole source deal for which no other company is permitted to bid.

A federal audit completed this past February revealed numerous irregularities mounting into the millions of dollars.

• On 58 occasions, Lipsey Mountain billed the government for using the same truck multiple times to deliver water – resulting in US$774,000 in questionable payments.
• Lipsey Mountain billed the government US$6.5 million for cargo flights that cost the company only US$4.9 million – a 26 percent profit auditors called “excessive.”
• Lipsey Mountain more than doubled its money on US$72,000 in transportation costs, billing the government US$149,000.
• Lipsey Mountain increased its price to ship water by air from 39 cents per liter to 49 cents, but then transported the water mainly by ground. This gave the company US$178,000 in additional profit.

In all, federal auditors say the government should recoup US$8.2 million from Lipsey Mountain. They also say the government should tighten up its accounting practices to ensure private contractors are not paid unless they submit proper invoices and other supporting documentation.[6]

There is no word yet on whether the government will pursue any action against Lipsey Mountain, or whether the contract will be extended when it comes up for review this April.

Meanwhile, a federal inquiry is underway into a no-bid contract won by the politically connected Shaw Group.

Based in the Lousiana state capital of Baton Rouge, Shaw won two US$100 million federal contracts to, among other projects, repair damaged levees and pump water out of New Orleans. The US$4.8 billion-a-year company was well known in Washington before Katrina. It has done more than US$100 million worth of reconstruction work in Iraq, and ranks 83rd among defense contractors doing business with the U.S. government, with $1.1 billion in projects from 1998-2003.[7]

One of Shaw’s lobbyists is Joe M. Allbaugh, who served as George W. Bush’s chief of staff when he was governor of Texas, managed Bush’s first presidential campaign in 2000, and went on to run the Federal Emergency Management Agency (FEMA) for Bush. Shortly after Katrina, the Shaw Group invited Allbaugh to Lousiana to help set up its disaster team and advise the company on how to gear its services to what the government needed. One of the no-bid contracts Shaw won just days after Katrina hit was with FEMA, which Allbaugh ran for two years.[8]

Shaw’s founder and chief executive officer, Jim Bernhard, also carries a great deal of influence – so much so that he resigned his position as chair of Louisiana State Democratic Party to deflect criticism that his political connections helped him win the federal contracts.

Shaw’s US$100 million FEMA contract was among many the New York Times reported was awarded under clouded circumstances. More than 80 percent of the US$1.5 billion in federal contracts handed out within a month after Katrina were signed without bidding or with limited competition.

"When you do something like this, you do increase the vulnerability for fraud, plain waste, abuse and mismanagement," said an official with the U.S. Department of Homeland Security, which oversees FEMA. "We are very apprehensive about what we are seeing.”[9]

Under growing pressure, FEMA later promised to reopen Shaw’s no-bid contract, as well as three other deals that drew criticism due to their political overtones. In March 2006, however, FEMA announced the contracts would not be re-bid.[10]

Facing continued Congressional, media and public scrutiny, federal investigators are now examining whether Shaw and other large, politically connected companies have unduly benefited from these deals. “It may well be nefarious,” said Clark Kent Ervin, a former high-ranking Homeland Security official.[11]

Yet to trigger a formal investigation but receiving media scrutiny are the new flood control pumps installed to prevent another Katrina-like disaster. Again, political connections are raising questions.

Amid the haste to put the 34 pumps into service before the start of the 2006 hurricane season, the U.S. Army Corps of Engineers ignored warnings from its own expert that they would likely fail during a hurricane, the Associated Press reported this past March.

In a memo obtained by the AP, an Army Corps engineer told the agency the pumps failed performance tests even less strenuous than those required. The pumps are now being removed and repaired because of excessive vibration, overheating, and broken hoses and gaskets.

The pumps were manufactured under a US$26.6 million contract with Moving Water Industries Corporation of Deerfield Beach, Florida. Company owner J. David Eller is a long-time friend of the Bush family and a former business partner of former Florida Governor Jeb Bush, the president’s brother. Since 1996, Eller has donated about $128,000 to political candidates, mainly members of the Republican Party.

Moving Water Industries has been touched by controversy in the past. The U.S. Justice Department sued the company in 2002, alleging it fraudulently helped Nigeria obtain US$74 million in taxpayer-backed loans for overpriced and unnecessary water pump equipment. The case remains open.[12]

Like corruption in general, shadiness in the water industry is not a new phenomenon in New Orleans.

In January 2006, a politically connected engineering executive named Gilbert Jackson admitted taking $19,500 from a lobbyist from the British firm Severn Trent, which was trying to win a contract to operate New Orleans’ water and sewer system in the late 1990s. Jackson had access to the right people. His company was advising city officials on how to structure the privatization plan, a $1.5 billion deal that would have been the largest in U.S. history.

Jackson was convicted on nine federal corruption charges and sentenced to nearly seven years in prison. Numerous public officials and business figures in several other U.S. cities were also convicted in what became a wide-ranging federal probe that lasted for years.

Not even the media could muster shock. “So now we learn...the process was corrupted to the point of illegality,” the New Orleans Times-Picayune wrote. “Is anyone out there surprised?”

A few years earlier, another company was caught issuing bribes in hopes of keeping its contract to operate two sewage treatment plants. The president of Professional Services Group – which had been implicated but not charged in a separate corruption scandal in Connecticut – was convicted and imprisoned for bribing a city official in the mid-1990s. The city official was also convicted and jailed. PSG’s parent company, Aqua Alliance, pleaded guilty and was fined $3 million.[13]

Today, civic leaders and citizens alike fear New Orleans’ legacy of corruption, abuse and waste will slow or perhaps even prevent the city from attracting the public assistance and private investment it needs to fully recover.

As it is, the city has more than enough problems working against it. Water, electricity, natural gas and other public services are still shaky. Thousands of businesses remain closed and may never reopen. Some 200,000 homes are uninhabitable and await leveling. Some hospitals and schools are still closed.

And, New Orleans has never been known for its economic vitality. Apart from a few weeks’ worth of Mardi Gras bacchanalia, a spotty convention industry, St. Charles Avenue’s old-money millionaires and silver-spooned Tulane students, the city has little to stand on financially.

Add to this the “corruption tax” – the price you often have to pay for doing business here – and investors are easily scared off. And the scandal-stung federal government has little interest getting involved in more projects that will culminate in convictions and political fallout.

The bottom line is that corruption not only costs New Orleans dollars. Hope, in short supply more than ever, also drains away.

“New Orleans is a deep, dark hole,” said Bernie Pinsonat, a political analyst in Baton Rouge. “People are tired of sending money there, and it never goes for what it’s intended. Outside New Orleans, they would bet the farm that it would be stolen or wasted.”[14]

Mark Worth is a researcher based in Berlin who writes about water and food safety issues for NGOs in Europe and the United States.

[1] Lipton, Eric. “'Breathtaking' Waste and Fraud in Hurricane Aid.” New York Times, 27 June 2006.

[2] Slevin, Peter and Whoriskey, Peter. ”Burdens of Past Limit New Orleans’ Future.” Washington Post, 10 November 2005.

[3] Lipton, op. cit.

[4] ”Oversight of Gulf Coast Hurricane Recovery, A Semiannual Report to Congress, April 1, 2006 – September 1, 2006.” President’s Council on Integrity and Efficiency, Washington, DC, October 2006.

[5] Slevin and Whoriskey, op. cit.

[6] ”Contract Administration of the Water Delivery Contract Between the Lipsey Mountain Spring Water Company and the United States Army Corps of Engineers.” Inspector General, U.S. Department of Defense, Washington, DC, Report No. D-2007-055, 5 February 2007.

[7] Center for Public Integrity, Washington, DC.

[8] Broder, John M. “In Storm's Ruins, a Rush to Rebuild and Reopen for Business.” New York Times, 10 September 2005.

[9] Lipton, Eric and Nixon, Ron. “Many Contracts for Storm Work Raise Questions.” New York Times, 26 September 2005.

[10] “FEMA breaks promise on Katrina contracts.” Associated Press, 24 March 2006.

[11] “Abuse could push Katrina costs to $2 billion.” Associated Press, 25 December 2006.

[12] Burdeau, Cain. “Corps placed faulty pumps in New Orleans.” Associated Press, 14 March 2007.

[13] Faulty Pipes. Food & Water Watch, Washington, DC, June 2006.

[14] Slevin and Whoriskey, op. cit.