Final Letter Report on the New York County District Attorney’s Administration of the Deferred Prosecution and Non-Prosecution Agreements

The objective of this audit was to determine whether the New York County District (DANY) properly administered the receipt and distribution of proceeds received through deferred prosecution and non-prosecution agreements in accordance with the New York City Comptroller’s Office Directive #11 “Cash Accountability and Control,” and aspects of applicable federal and New York State (“State”) rules and regulations.

DANY is an independent elected official responsible for the investigation and prosecution of criminal conduct in New York County.  In this capacity, DANY investigates and prosecutes a wide variety of illegal activities including white-collar crimes, international money laundering, securities fraud and terrorism.  Each year, DANY files more than 100,000 cases, which are handled by a staff of more than 500 assistant district attorneys and 700 investigative analysts, paralegals, and specially trained support staff members.

DANY’s operations are primarily funded by New York City (the “City”) through budget appropriations.  In addition, DANY receives money from a variety of other sources, the largest of which are State and federal asset forfeitures.  Forfeited funds are paid to DANY pursuant to Deferred Prosecution Agreements (“DPAs”) and Non-Prosecution Agreements (“NPAs”), as well as through other procedural mechanisms.   DPAs and NPAs, while procedurally different, function in a similar fashion.  Both involve voluntary pre-trial agreements between defendants (usually corporations) and a prosecutor that allow the defendants to avoid the consequences of a prosecution by paying fines and forfeitures and by agreeing to numerous other conditions, including cooperation with the government, institution of a compliance program and admissions of wrongdoing.

Both federal and State rules allow forfeited funds awarded to a law enforcement agency, such as DANY, to be expended for specified law enforcement purposes and to be distributed to other parties and government agencies for permissible uses.  In connection with DPAs governed under State law, DANY is allowed to retain a percentage of the forfeited funds for its own use and is required to transfer the balance of the forfeited funds in equal amounts to the State and to New York County, within thirty days of receipt.

The City requires agencies, including DANY, to deposit all of the funds they receive from sources other than their City budget allocations into bank accounts that are registered with the New York City Department of Finance (“DOF”).  As of June 30, 2015, DANY maintained 24 agency bank accounts with a total of $390 million in funds it received from sources other than its City budget allocations.  Of this amount, approximately $299 million was from DPAs.

Audit Findings and Conclusions

The audit found that DANY generally administered the receipts and disbursements of the proceeds received through DPAs in accordance with Directive #11 and other applicable federal and State rules and regulations.  Among other things:

• DANY implemented internal control procedures to ensure proper segregation of duties, adequate recordkeeping, and monthly bank reconciliations;
• DANY registered all its bank accounts with DOF and ensured all account balances were reported to the City as part of the year-end close out process; and
• DANY ensured that financial settlement amounts were properly and timely disbursed to the State and New York County in accordance with applicable law.

In addition to the above audit findings, we found that DANY did not make reasonable efforts to explore investment opportunities that would allow it to maximize the monetary benefit from at least $123 million in DPA funds deposited in registered bank accounts for which there was no immediate plan for disbursement or use.  As a result, DANY may have forgone potential investment returns that could have been earned had that money been put into conservative short-term investments, as allowed pursuant to Section 11 of the General Municipal Law.

As of June 30, 2015, DANY maintained approximately $299 million derived from federal and State DPAs in three interest bearing checking accounts.  Of the $299 million deposited in these checking accounts, we found that there was no plan for any immediate expenditure or disbursement to third parties for $123 million.  Some of the $123 million was received as early as March of 2009 and was still not expended as of June 2015.  Furthermore, our review found that the minimal interest earned on the checking accounts ranged from 0.002 percent to 0.0104 percent per month for the period of Fiscal Year 2014 to 2015.

Section 11 of the General Municipal Law provides that “the governing board of any local government or, if the governing board so delegates, the chief fiscal officer or other officer having custody of the moneys may temporarily invest moneys not required for immediate expenditure, except moneys the investment of which is otherwise provided for by law” in several types of investment vehicles as specified in the law, including bank certificates of deposit and certain types of government-issued obligations, among others.  However, DANY did not temporarily invest the funds as permitted by the General Municipal Law.  Consequently, over $100 million remained in interest bearing checking accounts earning only minimal interest.  Those funds could have been invested to provide higher investment returns, which in turn provide additional funds to supplement DANY’s operations and benefit the City.

Audit Recommendations

The audit recommends that DANY should:

• Develop an investment policy outlining procedures to invest funds not required for immediate expenditure in conservative investment vehicles as prescribed in Section 11 of the General Municipal Law to yield higher returns.
• Closely monitor its cash flow required for general operations and immediate disbursements in order to effectively invest the excess funds which are not required for immediate disbursement.

Agency Response

In its response, DANY stated that,

We are pleased with your positive findings and conclusions that this office has properly administered the receipt and disbursement of proceeds received through deferred prosecution and non-prosecution agreements (DPAs) in accordance will [sic] applicable city, state, and federal rules and guidelines. . . .    Our office notes that the $123 million referenced in the report as potentially eligible for investment represents proceeds governed by two different sets of rules and regulations.  Specifically, $82,668,506 is subject to Federal Equitable Sharing rules and oversight by the Department of Justice Asset Forfeiture and Money Laundering Section (AFMLS).  The balance of $40.4 million is governed by New York State statute Part H of Chapter 503 of the Laws of New York, 2009.  With respect to the $82.7 million, according to AFMLS guidelines DANY is prohibited from investing funds received through the Federal Equitable Sharing Program. . . .  Given this guidance, DANY maintains that our use of the commercial banking accounts for the $82.6 million in AFMLS funds is in accordance with AFMLS rules and DANY’s utilization of investment vehicles as recommend [sic] in the Audit Report would not be complaint [sic] with the governing rules established by AFMLS.

As for the remaining $40,448,793, the governing New York State statute does not provide guidance regarding the management of funds.  Given the lack of guidance, DANY chose to apply two other sets of relevant guidelines to its management of funds originating from state DPA statute: AFMLS and New York City Department of Finance banking rules and procedures. Based on this guidance, DANY did not explore investment opportunities for these funds.

Going forward, DANY will take the recommendations of the Audit Report into consideration and reassess how it manages its DPA funds. With respect to investment accounts, we will explore with your office and the New York City Department of Finance alternative investment vehicles that yield a higher rate of return for the $40.5 million that is subject to the New York State DPA statute.