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The federal government has recently proposed a rule that, if it becomes final, will impose additional compliance obligations
on most companies doing business with the federal government.
On November 14, 2007, the Civilian Agency Acquisition and Defense Acquisition Regulation Councils (“Councils”) issued a proposed
government-wide rule that would require federal contractors to notify contracting officers and agency inspectors general of
suspected violations of criminal law committed in connection with the award or performance of federal contracts and to fully
cooperate with federal investigators. Several of the Councils’ proposed changes come at the request of the Department of
Justice. The public comment period for the proposed rule will expire on January 14, 2008. The proposed rule builds upon
recent amendments to the Federal Acquisition Regulation requiring contractors to have a written ethics code and internal control
system.
Code of Ethics and Business Conduct
The November 14, 2007 proposed rule builds upon prior recent amendments to the FAR that will become effective on December
24, 2007.
The recent amendments to the FAR require all contractors receiving awards expected to exceed $5 million and with a performance
period of 120 days or more (except for commercial item acquisitions or contracts performed entirely outside the United States)
to have a written ethics code. It does so by including two new provisions, FAR 52.203-13 and 52.204-14, in solicitations
and contracts, which flow down to subcontractors.
Among other things, a contractor subject to the new FAR clauses is required to disseminate its written code to employees;
provide training; implement internal controls to facilitate timely discovery of improper conduct and ensure that corrective
measures are promptly instituted; and display fraud hotline posters. FAR 52.203-13 further provides that a contractor’s internal
control system should include periodic reviews of the company’s practices and procedures and the sufficiency of its internal
controls; internal reporting mechanisms; and disciplinary actions for improper conduct. The requirements for a formal ethics
awareness program and internal control system do not apply to small businesses.
The November 14, 2007 proposed rule would build on these recent amendments to the FAR in two ways. First, it would convert
the elements that an internal control system “should” have into elements that an internal control system “must” have. Second,
it would add additional mandatory elements, such as the assignment of responsibility at a sufficiently high level of the organization
and the commitment of adequate resources to ensure effectiveness of the compliance program and internal control system.
Required Reporting
The latest proposed rule would also go beyond the one that becomes effective on December 24th by requiring a contractor to immediately notify the government when it has reasonable grounds to believe that a principal,
employee, agent, or subcontractor violated federal criminal law in connection with the award or performance of a contract
or subcontract. What constitutes “reasonable grounds” and how this proposed rule may affect voluntary disclosures programs
will, no doubt, generate substantial public comment.
The proposed rule also amends FAR 9.406-2 and 9.407-2 to provide that the knowing failure to timely disclose a violation of
federal criminal law in connection with a government contract is a ground for suspension and for debarment. This provision
would apply to all contractors.
Full Cooperation
One of the proposed elements of the required compliance program is that the contractor provide “full cooperation” with any
government agencies responsible for audit, investigation or corrective actions. The proposed rule does not, however, attempt
to define what constitutes full cooperation. A primary question left unanswered is whether a company would be required to
waive the attorney-client privilege in order to be deemed as having fully cooperated.
Waiver of the attorney-client privilege has been a controversial subject in recent years. The Department of Justice issued
a series of memoranda entitled “Principles of Federal Prosecution of Business Entities” that directed prosecutors to consider
a company’s cooperation when deciding whether to bring criminal charges against a company. In gauging the extent of the company's
cooperation, prosecutors were specifically told that they could consider the company’s willingness to waive attorney-client
privilege and work product protection. This aspect of the Justice Department’s policy generated significant criticism and
led to proposed legislation in Congress. Ultimately, the Department issued a “clarification” of its policy on waiver that
represents a slight retrenchment. Please see McNulty Memorandum. Apparently recognizing that similar issues would result from its proposed requirement that contractors provide full cooperation,
the Councils stated that this element of the proposed rule will not immediately be included in the final rule, in order to
allow additional time for comment and analysis of the privilege waiver issue.
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The federal government’s renewed emphasis on procurement fraud should be a reminder to all contractors to make certain that
their compliance programs are up-to-date and effective. While the majority of government contractors may believe their compliance
programs are already adequate, it is prudent to review them in light of the developing standards and new requirements in this
area. Also, new companies entering the federal marketplace should ensure that they understand the requirements that accompany
the award of a federal contract.
