oversight

Deutsche Bank, New York, Job Creation and Retention Program Grant, Hotline Complaint Case Number HL-2012-0199

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-01-11.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                U.S. DEPARTMENT OF
                                 HOUSING AND URBAN DEVELOPMENT
                                          OFFICE OF INSPECTOR GENERAL




                                              January 11, 2013
                                                                                  MEMORANDUM NO:
                                                                                       2013-NY-1801

Memorandum
TO:             Yolanda Chavez
                Deputy Assistant Secretary - Grant Programs, DG



FROM:           Edgar Moore
                Regional Inspector General for Audit, New York-New Jersey Region, 2AGA

SUBJECT: Deutsche Bank, New York, Job Creation and Retention Program Grant, Hotline
         Complaint Case Number HL-2012-0199


                                            INTRODUCTION

The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General
(OIG), performed a review of Deutsche Bank’s Job Creation and Retention Program (JCRP)
grant in response to a HUD OIG hotline complaint, case number HL-2012-0199. On November
23, 2011, the United States Government Accountability Office referred to HUD OIG a
confidential complaint (FraudNet control number 58392) it received alleging that Deutsche Bank
officials fraudulently received a $34.5 million JCRP grant under the guise that they would
maintain 5,500 jobs in Lower Manhattan over a 10-year commitment period and that during this
period, Deutsche Bank officials did not maintain the employment goals. In addition, the
complainant alleged that Deutsche Bank officials could not have maintained the required
minimum employment number of 5,500 at 60 Wall Street since the building has a maximum
office occupancy capacity of approximately 3,400. As a result, the complainant alleged that
Deutsche Bank officials should be required to repay twice the value of the grant, or $69 million.
The objectives of the review were to determine whether the complaint alleging that Deutsche
Bank officials fraudulently received $34.5 million in Federal funding under the terms of the
grant disbursement agreement had merit and whether there were indications that Deutsche Bank
officials did not maintain the required minimum employment number1 during the commitment
period.

1
    The minimum employment number is defined as 6,500 full-time permanent employees within New York City, of
    which at least 5,500 were located south of the Canal Zone.
This memorandum contains four recommendations. In accordance with HUD Handbook
2000.06, REV-4, within 60 days, please provide us, for each recommendation in this
memorandum, a status report on (1) corrective action taken, (2) the proposed corrective action
and the date to be completed, or (3) why action is considered unnecessary. Additional status
reports are required 90 and 120 days after this memorandum is issued for any recommendation
without a management decision. Also, please furnish us copies of any correspondence or
directives issued because of this review.

Should you or your staff have any questions, please contact Karen A. Campbell, Assistant
Regional Inspector General for Audit, at (212) 542-7977.

                               METHODOLOGY AND SCOPE

To accomplish our objectives, we reviewed prior audit work regarding JCRP and Deutsche
Bank, HUD-approved action plans and amendments, program guidelines and amendments,
monitoring and fraud detection procedures, applicable Code of Federal Regulations provisions,
statutory and regulatory waivers, Deutsche Bank’s JCRP application and grant disbursement
agreement, the payment requisition and supporting documents, annual employment reports,
records documenting Empire State Development (ESD) officials’ monitoring of the annual
employment reports, and the World Trade Center’s employment database. In addition, using the
LexisNexis Investigative Portal, we researched the legal names, Federal employer and State
unemployment identification numbers, and addresses of nine Deutsche Bank entities represented
as having New York City employees. We also interviewed key ESD officials and the
confidential complainant.

We traced the employment information maintained in the World Trade Center’s employment
database to the annual employment reports submitted by Deutsche Bank officials for calendar
years 2004 through 2011. While ESD officials did not maintain the employment report for
calendar year 2003, for the purposes of this audit memorandum, we determined that the
information maintained in the employment database was sufficiently reliable.

We performed our fieldwork from August through October 2012, at ESD’s office located at 633
Third Avenue, New York, NY. The review covered the period July 2003 to December 2011 and
was expanded as deemed necessary.

                                       BACKGROUND

Founded in Germany in 1870, Deutsche Bank is a leading global investment bank with a
presence in more than 70 countries. Its core businesses are retail and private banking, corporate
lending, real estate lending, asset management, investment banking, and equity and debt trading.
As of the end of 2011, it employed approximately 100,000 people at more than 3,000 branches
worldwide, of which more than 11,000 were employed in the United States. In 1979, it opened
its first branch in New York and in October 2001, became the first German bank to be listed on
the New York Stock Exchange. As of January 1, 2012, Deutsche Bank reported a total of 7,082



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New York City employees, of which 6,248 were employed at its North American headquarters
located at 60 Wall Street in Lower Manhattan.

Before September 11, 2001, Deutsche Bank had more than 10,000 employees in Lower and
Midtown Manhattan. However, following the terrorist attacks, it lost the use of its primary
Lower Manhattan properties and was forced to temporarily relocate employees to other
locations, including those outside of New York City. While Deutsche Bank had already
purchased the building at 60 Wall Street in Lower Manhattan in November 2001, the $34.5
million JCRP grant offer sealed its commitment to relocate its headquarters, along with at least
5,500 employees, to that site by December 31, 2003. Deutsche Bank also agreed to retain a total
of at least 6,500 New York City employees over 10 years. ESD officials approved Deutsche
Bank’s JCRP project on April 23, 2003, and disbursed the full amount of the grant on July 21
2003. Deutsche Bank’s commitment period will end July 2013.

In the aftermath of the September 11, 2001, terrorist attacks on the World Trade Center in New
York City, Congress appropriated a total of $3.483 billion in HUD Community Development
Block Grant (CDBG) Disaster Recovery Assistance funds to the State of New York for the
economic recovery and revitalization of Lower Manhattan. The State of New York designated
the New York State Urban Development Corporation, doing business as ESD, to administer the
initial $700 million of the $3.483 billion2 appropriation. Funded by the initial appropriation and
a supplemental allocation from the Lower Manhattan Development Corporation’s $2 billion
CDBG disaster recovery assistance award, the World Trade Center Job Creation and Retention
Program was established and is administered by ESD in cooperation with the New York City
Economic Development Corporation. ESD is New York State’s chief economic development
agency, the mission of which is to promote, through the use of loans, grants, tax credits, and
other forms of financial assistance, a vigorous and growing economy and encourage the creation
of new job and economic opportunities across the State.

As of May 30, 2012, HUD had approved approximately $318.3 million for the program. The
purpose of the program is to provide discretionary grants to eligible companies that commit to
creating a minimum of 75 new jobs in Lower Manhattan, as well as to those making
commitments to retain at least 200 Lower Manhattan jobs. Jobs must be maintained in Lower
Manhattan for a commitment period of at least 10 years. Failure to maintain the job
commitments will subject companies to the recapture of the grant funds. Grant funds may be
used for wages, payroll taxes, employee benefits, rent, and movable equipment and furniture.
Companies must submit annual employment reports to ESD by February 1 of each year for the
duration of the grant term. The deadline for eligible businesses to request assistance through the
program is December 31, 2013.




2
    The Lower Manhattan Development Corporation administers the remaining $2.783 billion. The $2 billion was
    awarded for the World Trade Center disaster recovery and rebuilding efforts and the $783 million for damaged
    properties and businesses, including the restoration of utility infrastructure, as well as economic revitalization
    related to the terrorist attacks.


                                                             3
                                            RESULTS OF REVIEW

Our review determined that ESD officials did not maintain adequate documentation to
substantiate the merits of the complaint. While ESD officials complied with established
procedures for monitoring the JCRP grant and there was no indication that Deutsche Bank
officials did not maintain the required minimum employment number during the commitment
period, the monitoring procedures need to be strengthened to ensure that ESD officials obtain
and maintain sufficient documentation supporting the accuracy of the self-certified employment
reports. The allegation that Deutsche Bank officials could not have maintained the required
minimum employment number of 5,500 at 60 Wall Street since the building has a maximum
office occupancy capacity of approximately 3,400 has no merit. A certificate of occupancy,
dated December 20033, revealed that the building had a maximum office occupancy of at least
11,850 persons.

The specific results of the review are discussed below.

                                Adequate Documentation Was Not Maintained

Section 15 of the Federal Register Docket No. 4732-N-04, dated May 22, 2002, requires ESD
officials to maintain adequate documentation to substantiate the employment reports submitted
by Deutsche Bank officials. Although ESD officials obtained employment reports showing that
Deutsche Bank officials exceeded the employment goals throughout the commitment period,
sufficient documentation was not obtained to substantiate the reported information. Thus, the
merits of the complaint alleging that Deutsche Bank officials fraudulently received a $34.5
million JCRP grant under the terms of the grant agreement and did not maintain the required
minimum employment number during the commitment period could not be proven.

In accordance with the terms of the grant agreement, executed June 25, 2003, ESD officials
disbursed the grant of $34.5 million in one lump-sum payment on July 21, 2003, after Deutsche
Bank officials had submitted a payment requisition and reasonable documentation showing that
their entities had at least 6,500 full-time permanent employees.4 ESD officials deemed an
employment report and the most recent New York State (NYS)-45 (Quarterly Combined
Withholding, Wage Reporting, and Unemployment Insurance Return) filed with the New York
State Department of Labor to be reasonable documentation. Accordingly, Deutsche Bank
officials submitted a self-certified employment report, and a NYS-45 to confirm the employment

3
    Several certificates of occupancy exist for 60 Wall Street; however the certificate of occupancy, dated December
    18, 2003, is referenced since Deutsche Bank officials were required to relocate 5,500 full-time permanent
    employees to 60 Wall Street by no later than December 31, 2003.
4
    Full-time permanent employees are defined as full-time or the equivalent of two part-time, private-sector
    employees on the payroll of any of the Deutsche Bank entities, who have worked in New York City for a
    minimum or a combined minimum of 35 hours per week for at least 4 consecutive weeks and who are entitled to
    receive fringe benefits. Also, contract employees, considered full-time permanent employees, are defined as full-
    time or the equivalent of two part-time, private-sector employees (or self-employed individuals) that are not on
    the payroll of any of the Deutsche Bank entities but who have worked in New York City for any of the Deutsche
    Bank entities for a minimum or a combined minimum of 35 hours per week for at least 4 consecutive weeks,
    providing services that are similar to services that would otherwise be performed by full-time permanent
    employees.

                                                           4
information. While the NYS-45 neither differentiated between full- or part-time and permanent
or casual (temporary) employees nor was accompanied by a multiple worksite report listing the
addresses of Deutsche Bank’s entities located in several New York City locations, ESD officials
disbursed the grant relying on the fact that the aggregate number of employees reflected on the
NYS-45 exceeded the required minimum employment number. Furthermore, since the NYS-45
reflected that the employment goals had been met, ESD officials did not require Deutsche Bank
officials to provide documentation supporting the number of contract employees included in the
employment number.

Before receiving the JCRP grant, Deutsche Bank officials reported a total of 7,487 New York
City employees, of which 1,259 were located south of the Canal Zone. However, the most
recently filed NYS-45 for the first quarter of 2003 reflected approximately 8,275 employees, and
it did not identify where the employees worked. Moreover, ESD officials did not obtain
documentation reconciling the employment numbers as they considered reconciliation
unnecessary since the employment report and NYS-45 both showed that Deutsche Bank officials
exceeded the employment goals.

ESD officials maintained neither the calendar year 2003 annual employment report nor
documentation to support that Deutsche Bank had relocated up to 5,500 full-time permanent
employees to 60 Wall Street by the December 31, 2003, deadline. For calendar years 2004 and
2005, ESD officials obtained quarterly employment numbers directly from the Department of
Labor to verify Deutsche Bank’s employment reports. Yet, in 2007, citing privacy concerns, the
Department of Labor refused to provide future employment information. Therefore, for calendar
year 2006, ESD officials obtained a copy of the NYS-45 for the fourth quarter of 2006 directly
from Deutsche Bank officials. However, ESD officials did not maintain documentation
reconciling the quarterly employment numbers obtained during the employment verification
process to Deutsche Bank’s employment reports, which were based on the average number of
full-time permanent employees over the previous 12-month period. Moreover, for the past 5
calendar years (2007 through 2011), ESD officials had not verified Deutsche Bank’s
employment reports.

With the exception of calendar year 2003,5 Deutsche Bank officials reported that they had
exceeded the employment goals for calendar years 2004 through 2011, as detailed in the table
below. However, ESD officials did not obtain and maintain adequate documentation to provide
reasonable assurance that the employment numbers that Deutsche Bank officials reported were
based on the grant agreement’s definition of full-time permanent employees and the formula for
determining the number of such employees.




5
    For calendar year 2003, Deutsche Bank was not required to maintain an average of 5,500 full-time permanent
    employees in Lower Manhattan because under the terms of the grant disbursement agreement, it was not required
    to relocate at least 5,500 full-time permanent employees until December 31, 2003.

                                                         5
                           Average number of full-       Average number of full-   Total average number of
                              time permanent                time permanent           full-time permanent
    Calendar year          employees south of the        employees within other     employees within New
                                Canal Zone               New York City locations           York City
         2003                      4,015                         3,364                       7,379
         2004                      5,712                         2,498                       8,210
         2005                      5,634                         2,247                       7,881
         2006                      6,022                         2,290                       8,312
         2007                      6,549                         2,172                       8,721
         2008                      6,361                         1,837                       8,198
         2009                      5,852                         1,523                       7,375
         2010                      6,038                         1,244                       7,282
         2011                      5,874                         1,023                       6,897

                    More Effective Monitoring Procedures Should Be Established

In accordance with 24 CFR 85.40(a), ESD officials did not establish effective monitoring
procedures to reasonably ensure the accuracy of Deutsche Bank’s annual employment reports
evidencing that it maintained its required minimum employment number.

Before 2007, ESD officials’ monitoring of the annual employment reports consisted of obtaining
from the New York State Department of Labor quarterly employment numbers that grant
recipients had reported on the NYS-45. In the event that discrepancies of 10 percent or greater
were found between the employment numbers the Department of Labor reported and those
reported by the grant recipients, ESD officials followed up by requesting an explanation and
supporting documentation, including the NYS-45s, payroll registers, or an affidavit from the
grant recipients attesting to the accuracy of their employment reports.

In 2007, following the Department of Labor’s refusal to provide future employment information,
ESD officials’ monitoring of the annual employment reports consisted of verifying 15 percent of
grant recipients (in terms of the grant amount) each year on a rotating basis. For example, in the
first year, ESD officials requested that the top 15 percent of grant recipients submit their NYS-
45s for the fourth quarter of the previous year. The following year, ESD officials requested that
the next 15 percent do the same.

However, ESD officials’ monitoring procedures were ineffective and should be strengthened
since the existing procedures did not require ESD officials to (1) obtain documentation
demonstrating that the self-certified employment reports were based on the grant’s agreement
definition of full-time permanent employees and formula for determining the number of such
employees; (2) reconcile the quarterly employment numbers obtained during the verification
process to the annual employment reports; (3) obtain information identifying the number of
employees at each of Deutsche Bank’s New York City locations and supporting documentation
for contract workers included in the employment number; and (4) perform more frequent
verifications of the Deutsche Bank’s annual employment reports.

                                                     6
In addition, the existing monitoring procedures did not require that ESD officials perform
sufficient tests of Deutsche Bank’s annual employment reports to ensure that they accurately
reflected that the employment goals were maintained throughout the commitment period. While
ESD officials asserted that there was no practical and feasible way to guarantee absolute
compliance with the grant’s employment requirements, they acknowledged the importance of
employment verifications. However, ESD officials asserted that staffing and time constraints
prevented them from performing additional procedures that might have been more effective.
Nevertheless, the officials maintained that until this recent complaint, which could not be
substantiated, no fraud had ever been identified in the JCRP program.

As previously mentioned, before receiving the JCRP grant Deutsche Bank officials reported a
total of 7,487 New York City employees. Yet, the most recently filed NYS-45 for the first
quarter of 2003 reflected approximately 8,275 employees. Since the difference between the
employment numbers was more than 10 percent ([8,275 - 7,487] / 7,487 x 100 = 10.52 percent
ESD officials should have obtained an explanation and supporting documentation reconciling the
numbers. However, ESD officials asserted that, in accordance with their procedures, when
employment numbers obtained during the verification process reflected that Deutsche Bank
officials maintained more than the required minimum employment number, no further action was
required. In addition, although calendar years 2004 through 2006 employment numbers obtained
during the verification process did not differentiate between full- and part-time or permanent and
casual (temporary) employees, they reflected fewer employees than those reported by Deutsche
Bank officials, but more employees than those required to meet the employment goals. ESD
officials contended that only discrepancies demonstrating that employment numbers were less
than required would trigger further investigation. While ESD officials did obtain an explanation
for the discrepancies noted for calendar years 2004 through 2006, supporting documentation was
not obtained. ESD officials also clarified that they verified contract employees only in the event
that the total number of the grant recipients’ employees were insufficient to meet the
employment goals.

                                        CONCLUSION

Our review determined that ESD officials did not maintain adequate documentation to
substantiate the merits of the complaint. Although ESD officials complied with established
procedures for monitoring the JCRP grant and there was no indication that Deutsche Bank
officials did not maintain the required minimum employment number, ESD officials’ monitoring
procedures need to be strengthened to ensure that sufficient documentation supporting the
accuracy of the self-certified employment reports is obtained and maintained. The allegation
pertaining to the maximum office occupancy capacity at 60 Wall Street has no merit. A
certificate of occupancy, dated December 2003, revealed that the building had a maximum office
occupancy of at least 11,850 persons.




                                                7
                                  RECOMMENDATIONS

We recommend that HUD’s Deputy Assistant Secretary for Grant Programs instruct ESD
officials to

1A. Develop additional procedures to ensure that documentation fully supporting the accuracy
    of the JCRP grant recipients’ self-certified employment reports is obtained and maintained
    in the program files.

1B. Strengthen monitoring procedures to reasonably ensure the accuracy of annual employment
    reports submitted by JCRP grant recipients by requiring them to also submit documentation
    demonstrating that the reported employment numbers are based on the grant agreement’s
    definition of full-time permanent employees and the formula for determining the number of
    such employees.

1C. Require JCRP grant recipients to provide documentation, such as payroll records, in
    support of written explanations regarding material differences between the employment
    numbers reported to ESD officials and those reported on the NYS-45.

1D. Modify the current employment verification procedures to ensure that JCRP grant
    recipients are monitored more frequently during their commitment period.




                                               8
Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1
Comment 2

Comment 3




                          9
Ref to OIG Evaluation   Auditee Comments




                         10
Ref to OIG Evaluation   Auditee Comments




Comment 4

Comment 3


Comments 1
and 2
Comment 5

Comment 6




                         11
Ref to OIG Evaluation   Auditee Comments




Comment 6




Comment 7



Comment 8


Comment 9




                         12
Ref to OIG Evaluation   Auditee Comments




Comment 9




Comment 6

Comment 10




Comment 11




Comment 12




                         13
Ref to OIG Evaluation   Auditee Comments




Comment 12




                         14
                                  OIG Evaluation of Auditee Comments

Comment 1          While ESD's JCRP monitoring procedures were reviewed during previous audits,
                   the audit results were not without comment or criticism as ESD officials contend.
                   In 20046, we reported that ESD officials neither established written monitoring
                   procedures nor maintained adequate written or computerized documents to
                   support their monitoring efforts.

                   While conducting our audit review in 2005, we learned that ESD officials had
                   been independently verifying all employment numbers reported by the grant
                   recipients through their New York State Department of Labor contact. Thus, at
                   that time, we concluded that the monitoring procedures were adequate and did not
                   take exception to them. The scope of our 2007 audit did not include a review of
                   ESD's current monitoring procedures, but rather a review of program
                   disbursements conducted during the survey. Lastly, during our 2008 audit, we
                   verbally expressed concern to an ESD official over the loss of the Department of
                   Labor as an independent source of corroborating employment information. Yet,
                   to date, ESD officials had not developed additional procedures to independently
                   verify the employment reports.

Comment 2          Although ESD officials complied with the current monitoring procedures, they
                   remain open to any forthcoming recommendations to enhance and strengthen their
                   existing procedures. During the November 27, 2012, exit conference we advised
                   ESD officials to work with HUD program management officials to devise a
                   feasible corrective action plan in response to our recommendations.

Comments 3 ESD officials agreed with our recommendation to dismiss the complainant's
           allegation regarding the maximum office occupancy capacity of the 60 Wall
           Street building.

Comments 4 The complainant did contend that Deutsche Bank officials routinely moved jobs
           out of New York City. Therefore, the complainant’s suggestion that Deutsche
           Bank officials should be required to repay twice the value of the grant would have
           been relevant had we determined that the required 5,500 Lower Manhattan jobs
           were not maintained due to job relocations.

Comments 5 We recently spent several months reviewing documents ESD officials provided
           while attempting to evaluate the merits of the complainant's allegations, not
           attempting to find ways to improve the accuracy of the ESD's existing verification
           process. Nevertheless, in addition to recommending increases in the number and
           frequency of the verification audits, during the November 27, 2012, exit
           conference, we recommended that ESD officials consider using sampling when
           verifying the reported employment numbers.


6
    Audit report number 2004-NY-1001, issued March 25, 2004, covered the period April 1 through September 30,
    2003, and the audit field work was performed from August 2003 through March 2004.

                                                        15
Comments 6 While ESD officials contend that it may be almost impossible to verify grant
           recipients' employment numbers with complete certainty since detailed reviews of
           100 percent of the reported employment numbers would be costly, time
           consuming, and impractical, by using sampling during the verification process,
           ESD officials will be able to test the accuracy of the employment reports.

Comments 7 ESD officials should require all grant recipients to provide a list of employees by
           location and select a sample of those employees to independently verify their
           locations through site visits, telephone contact, or other methods.

Comments 8 ESD officials should require all grant recipients to provide information regarding
           the names of their various subsidiaries, employer identification numbers, and the
           human resources departments to facilitate the verification of a selected sample of
           employees.

Comments 9 ESD officials should require all grant recipients to submit documents identifying
           the classification of full- and part-time employees, as well as other qualified
           employees, including partners, demonstrating that the reported employment
           numbers are based on the grant agreement's definition of full-time permanent
           employees. In addition, ESD officials should independently verify a selected
           sample of the employees identified within each classification by reviewing the
           Automatic Data Processing payroll records, contacting the employees face-to-face
           or by telephone, or other methods.

Comment 10 Although ESD officials have been conducting employment verifications for
           almost twenty years and have found no material evidence of fraud, officials
           acknowledge that it is almost impossible to verify the employment numbers grant
           recipients report with complete certainty. Therefore, it is possible that
           occurrences of fraud may have gone undetected. Furthermore, the potential for
           fraud greatly increases when grant recipients recognize that ESD officials do not
           monitor reported employment numbers by obtaining independent, corroborating
           evidence from other sources.

Comment 11 While the United States monthly job reports may be inherently inaccurate as they
           are estimates of the nation's employment situation, the reported information is
           based on a representative sample of households and businesses, which have been
           contacted both face-to-face and by telephone to participate in employment
           surveys. ESD officials should follow this model by using sampling and a similar
           contact method to obtain information during the employment verification process.

Comment 12 ESD officials' proposed actions are responsive to our recommendations.
           However, we encourage the officials to work with HUD program management
           officials to develop a cost effective action plan to strengthen and enhance the
           current monitoring procedures. In additional, ESD officials should consider
           incorporating sampling into their employment verification process.



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