DOI EXAMINATION FINDS COMPLIANCE AND GOVERNANCE RISKS AT 51 CITY-FUNDED NONPROFITS THAT OPERATE NYC HOMELESS SHELTERS AND FLAWED CITY OVERSIGHT OF DHS-FUNDED PROVIDERS

 

DOI issued 32 reforms to address system-wide vulnerabilities

Jocelyn E. Strauber, Commissioner of the New York City Department of Investigation (“DOI”), issued a Report today memorializing the key findings from DOI’s extensive examination of compliance risks at 51 nonprofit human service providers that operate many of the homeless shelters in New York City and of the City’s oversight of the shelter system. The Report includes DOI’s 32 recommendations for reform, intended to protect the billions of dollars that the City spends annually on shelter services from corruption, waste, fraud, and abuse. A copy of the Report follows this release and can be found here: https://www.nyc.gov/site/doi/newsroom/public-reports.page.

DOI Commissioner Jocelyn E. Strauber said, “When it comes to protecting the vast taxpayer resources that City-funded nonprofits receive, prevention is key. City-funded nonprofit service providers pose unique compliance and governance risks, and comprehensive City oversight is the best way to stop corruption, fraud, and waste before it starts. This deep dive into the City-funded homeless service provider system builds on DOI’s extensive experience investigating nonprofit fraud, and our 2021 Report concerning City-funded nonprofits. Today’s Report provides ample evidence of the risks specific to nonprofits and shortcomings in City oversight and makes 32 recommendations to strengthen controls around this essential network. I thank the DOI team that has worked tirelessly on this investigation and the many City entities that provided assistance, including the staff from the City Department of Social Services who worked closely with DOI to support this examination.”

The City, through the City Department of Social Services (“DSS”) and the City Department of Homeless Services (“DHS”), operates the largest homeless shelter system of any municipality in the United States. DHS-funded shelters currently support an average of over 86,000 people per night at a cost of approximately $4 billion annually in FY 2024, up from $2.7 billion annually in FY 2022, due in large part to the influx of asylum seekers over the past two years. (DOI did not review City-funded contracts involving services to the asylum seekers that were procured under emergency procedures for this Report. DOI has oversight of these expenditures through an integrity monitor that is supervised by and reports to DOI.) 

This Report identifies a variety of compliance and governance risks at these providers, as well as in the City’s overall management of the shelter system. These risks vary in their severity and include: 

• Conflicts of interest affecting City money. DOI identified cases where insiders at the shelter provider had personal business interests involving the shelter through which they received payments outside their regular compensation. In some cases, shelter executives simultaneously held employment at a private entity, such as a security company, that was hired to provide services at City-funded shelters. 

• Poor Citywide controls over how City money is used for executive compensation. DOI identified multiple shelter executives who received more than $500,000 per year, and in some cases, more than $700,000 per year, from providers and related organizations. Executive compensation in these cases is funded either largely or in part through City funds. The City lacks sufficient rules concerning how much City money can be allocated to nonprofit executives’ salaries. 

• Nepotism, in violation of City contracts. DOI found shelter providers that have employed immediate family members of senior executives and board members, in apparent violation of their City contracts. For instance, one provider that is largely funded by the City employed its CEO’s children since at least 2007. This provider subsequently entered into a DOI-managed monitorship agreement.

• Shelter providers failing to follow competitive bidding rules when procuring goods and services with public money. DOI found numerous cases where shelter providers did not comply with the City’s competitive bidding requirements or where it was unclear whether shelter providers conducted true competitive bidding processes. For example, this review identified multiple instances where shelter providers awarded multimillion-dollar building maintenance service contracts to companies affiliated with the buildings’ landlords.

DOI issued 32 recommendations to address the system-wide vulnerabilities noted in this Report. Included among the key recommendations are: 

➢ DSS should appoint a Chief Vendor Compliance Officer to provide overall leadership for DSS and DHS’s compliance strategy with respect to nonprofit human service contracts, including contracts with shelter providers. 

➢ Shelter providers should be required to regularly disclose additional information relevant to identifying compliance risks, including potential conflicts of interest for key persons. 

➢ DSS and DHS should take steps to improve their oversight of shelter operators’ expenditures, including by immediately stopping payments for costs that are not accompanied by a proper description and ensuring that relevant agency staff receive regular financial compliance training. 

➢ The City should update its electronic procurement and invoicing systems to better enable thirdparty oversight and centralize key documentation. 

This Report also reiterates many of the 23 recommendations that DOI issued in its November 2021 Report on Corruption Vulnerabilities in the City’s Oversight and Administration of Not-for-Profit Human Services. While the City has implemented some reforms since the 2021 Report and is also undertaking some work that closely tracks DOI’s recommendations, many of the recommendations from 2021 have not been implemented at any substantial level. The 2021 Report recommended, among other things, that the City:

 Reform its conflict-of-interest disclosure system for the City’s human service providers. 

 Develop more specific guidance to agencies on executive compensation and consider setting a cap or other parameters on City-funded executive compensation. 

 Conduct more robust reviews of expenses that human service providers invoice to the City, including by reviewing larger samples of supporting documentation.