Companies that do business with the federal government operate in
an ever-intensifying regulatory and enforcement environment. The temperature is
about to be turned up again with the onset of a new Federal Acquisition
Regulation (“FAR”) that will add an “integrity reporting” requirement. Federal
contractors and subcontractors will be expressly mandated to timely disclose to
their government contracting officers any known violation of federal law
relating to their contracts. Failure to so disclose could be cause for
suspension or debarment. This impending new rule follows closely on the heels
of FAR requirements that took effect at the end of 2007 requiring contractors
and subcontractors working on federal projects of sufficient size and duration
to implement compliance and ethics programs within their organizations.
Of course, determining whether or not a
violation of law has actually occurred — and therefore whether a disclosure
obligation exists — is easier said than done. It is therefore imperative for contractors
doing business with the federal government, to commence internal investigations
that are thorough, independent and protected by the attorney-client privilege immediately
upon becoming aware of an allegation of internal wrongdoing. Equally
as important for all federal contractors — indeed, for all but the smallest
businesses, of any kind — is to put in place effective internal compliance
programs that detect and deter violations of law.
I. FAR rules for
contractor codes of business ethics and conduct
Recently approved Federal Acquisition
Regulations, made effective on Dec. 24, 2007, require contractors and
subcontractors performing certain federal contracts to:
(i) have a written code of business ethics and
conduct;
(ii) provide a
copy of said code to each employee;
(iii) institute
an accompanying compliance training program; and
(iv) display
anti-fraud hotline posters in common work areas and worksites.
See FAR 52.203-13 and FAR
52.203-14.
These business integrity measures are mandatory
for government contracts that exceed $5 million and have performance periods of
120 days or more. See FAR 3.1004. Contractors selling exclusively
“commercial items” are exempt from the requirements.1
In addition, certain contractors who identified themselves to the federal
contract officer at the time of bidding as a small business, and who qualify as
such, are also exempt from most of the new FAR rules on compliance programs.
To promote compliance with this provision, these
new FAR provisions even dictate the objective of the Contractor Codes of
Business Ethics and Conduct. The new FAR rule states that “contractors should
have an employee business ethics and compliance training program and an
internal control system that —
(1) Are suitable to the
size of the company and extent of its involvement in government contracting;
(2) Facilitate timely
discovery and disclosure of improper conduct in connection with government
contracts; and
(3) Ensure corrective
measures are promptly instituted and carried out.”
FAR 3.1002. See also FAR 52.203-13(d). These
three guidelines are quite generalized and allow contractors and their advisors
to tailor an effective compliance program appropriate for the particular
company and industry.
II. Proposed FAR “integrity reporting” rule
During the approval process for the regulations
that mandated Contractor Codes of Business Ethics and Conduct, the Department
of Justice (“DOJ”) advocated for adoption of an additional anti-fraud measure —
a mandatory fraud-reporting requirement for contractors and subcontractors who
become aware of violations of federal criminal law with regard to government
contracts or subcontracts. See 72 Fed. Reg. 64019. To
avoid delay, the Civilian Agency Acquisition Council and the Defense
Acquisition Regulations Council (the “councils”) carved out the proposed
reporting requirement from the Code of Business Ethics and Conduct rules that
took effect on Dec. 24, 2007. See id. The councils then
submitted the reporting measure for public consideration as a separate
proposed rule. See 73 Fed. Reg. 28407.
A. Elements of new proposed rule
Following the earlier DOJ recommendation, the
councils published FAR Case 2007-006 “Contractor Compliance Program and
Integrity Reporting” in the Federal Register on Nov.
14, 2007. See 73 Fed. Reg. 28407. The “compliance program”
part of the rule would require contractors to establish and maintain internal
controls to detect and prevent fraud in connection with the award or performance
of government contracts or subcontracts. The “integrity reporting” part of the
rule would impose a mandatory disclosure requirement on government contractors
and subcontractors who become aware of violations of federal criminal law. The
mandatory disclosure requirement is necessary, according to the DOJ, because few
companies voluntarily report suspected instances of federal criminal violations
relating to contracts or subcontracts. See 72 Fed. Reg. 64020.
To implement the DOJ request, the councils
proposed modifying FAR Subpart 9.4 (governing the grounds for debarment or suspension
of government contractors) to include, as punishable offenses, “knowing failure
to timely disclose” either (i) an overpayment on a government contract or (ii)
a violation of federal criminal law in connection with the award or performance
of a contract or subcontract. See 72 Fed. Reg. 64022. The
councils also proposed inserting the following clause into the (recently
enacted) Code of Business Ethics requirement at FAR Subpart 52.203-13: “The
Contractor shall notify, in writing, the agency Office of the Inspector General,
with a copy to the Contracting Officer, whenever the Contractor has reasonable
grounds to believe that a principal, employee, agent, or
subcontractor of the Contractor has committed a violation of
Federal law ….” See 72 Fed. Reg. 64022 (emphasis added).
This does not mean that it is required
or advisable for a contractor to report every alleged violation of law that
comes to its attention to the government. On the contrary, for a contractor to
responsibly determine whether or not it has “reasonable grounds to believe”
that a violation of law has actually occurred, it must exercise due diligence
and internally investigate the facts and circumstances of
the alleged events at hand, and to seek legal advice as to whether the most
likely set of facts form a reasonable basis to believe a violation of law
occurred. Ideally, contractors should utilize outside counsel both to lead the
internal investigation — to ensure independence, thoroughness, and protection
of the attorney-client privilege at least until the time a disclosure decision
is made — and, of course, to furnish the legal advice.
But just as it is important for contractors not
to succumb to skittishness or governmental pressure and disclose every
allegation of wrongdoing, it is critical that contractors not ignore violations
of law that could be occurring in their own organizations, or to turn a blind
eye to fraud or other wrongdoing in their midst. Implementing robust internal
controls and compliance programs — programs that are even more robust, in most
cases, than the minimum Code of Business Ethics elements set forth in the FAR —
is cost-effective insurance against the type of corporate inattention that can
allow internal wrongdoing to fester and grow.
B. Even violations of the civil false
claims act may be subject to mandatory disclosure
On May 16, 2008, the councils published public
comments and suggested changes to the first proposed rule in the Federal Register.2
See
73 Fed. Reg. 28407. Among the recommendations, the DOJ proposed to increase the
scope and stringency of the mandatory reporting requirement by requiring
contractors to report violations of the civil False Claims Act (31
U.S.C. 3729-3733) in addition to criminal violations. See
id. The proposal would make knowing failure to report such civil
violations a cause for debarment or suspension under FAR Subpart 9.4. See
73 Fed. Reg. 28408.
As with the proposed FAR rule about mandatory
reporting of criminal violations, “evidence of knowing failure [by contractors]
to timely disclose civil False Claims Act violations in connection with
government contracts” could result in debarment or suspension from government
work pursuant to FAR Subpart 9.4. See 73 Fed. Reg. 28409. And
as with the proposed rule about criminal violations, FAR Subpart 52.203-13
would be modified to require contractors to notify the OIG and the government contracting officer whenever contractors have
reasonable grounds to believe a civil violation has occurred. See
id. The review standard would be by preponderance of evidence of a
knowing failure to report. See id.
On November 12, 2008, the Federal Register
published the final “integrity reporting” rule, and made it effective December
12, 2008. One noteworthy revision from the language of the proposed rule: the
much-criticized “reasonable grounds to believe” standard triggering the
disclosure obligation was changed to a “credible evidence” standard instead.
The disclosure applies to all federal contracts, not just those exceeding $5
million and 120 days in duration. In sum, the final rule requires any federal
contractor or subcontractor to disclose to the relevant federal agency’s Office
of Inspector General credible evidence of (a) federal criminal law violations
involving fraud, conflict of interest, bribery or gratuities; (b) violations of
the civil False Claims Act; or (c) significant overpayment on the contract.
III. Conclusion
Criminalizing federal contractors’ failure to
disclose violations of criminal and even civil laws ratchets up an already
intensive enforcement apparatus for those who do business with the federal
government. Some contractors may thus shy away from federal work altogether,
and some may be inclined against their better judgment to report every
allegation of wrongdoing to the government. Neither is a wise approach.
Instead, contractors can both honestly prosper in their federal work and
faithfully execute all of their duties under their federal contracts —
especially these forthcoming disclosure duties — by implementing an effective
compliance program and exercising the judgment to promptly commence a through,
independent and attorney-client privileged internal investigation upon becoming
aware of an allegation of wrongdoing.
End notes
1. The
FAR defines a “commercial item” as “any item, other than real property, that is
of a type customarily used by the general public or by non-governmental
entities for purposes other than for governmental purposes, and (i) has been
sold, leased or licensed to the general public; or, (ii) has been offered for
sale, lease, or license to the general public.” FAR 2.101.
2. FAR Case 2007-006 now officially contains “2nd
Proposed Rule” in its title. Note that only new proposed changes were
republished in the May 16, 2008, Federal Register