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Saturday, May 31st, 2008
GOVERNMENT CONTRACTS ALERT

CONTRACTOR COMPLIANCE PROGRAM AND INTEGRITY REPORTING – -THE LATEST AND GREATEST

On May 16, 2008, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (the “Councils”) published changes to Federal Acquisition Regulation (“FAR”) Case 2007-006, Contractor Compliance Program and Integrity Reporting, which was initially published on November 14, 2007. We discussed the controversial provisions included in FAR Case 2007-006 in our February 2008 Government Contracts Alert, such as the requirement to notify the agency Office of Inspector General (“OIG”) whenever a contractor has reasonable grounds to believe that there has been a violation of Federal criminal law in connection with the award or performance of a contract or any subcontract thereunder (see the Maynard, Cooper and Gale February 2008 Government Contracts Alert). Comments were due on January 14, 2008. Comments on the new iteration of FAR Case 2007-006, the May 2008 “2nd Proposed Rule”, are due on July 15, 2008. There will be no final rule until comments are received and considered on the May 2008 2nd Proposed Rule.

The Councils received 33 comments on the November 2007 proposal rule. According to the preamble, the comments expressed concerns about the proposed exemption for contracts to be performed entirely outside the United States and the proposed exemption for contracts for the acquisition of commercial items. Additionally, the preamble provides that the Department of Justice (“DOJ”) proposed adding a requirement for contractors to report violations of the civil False Claims Act (“FCA”), and adding knowing failure to timely report such violations as an additional cause for debarment or suspension. DOJ also expressed concerns about the exemption for contracts to be performed entirely outside the United States.

No more exemption for overseas contracts. The May 2008 2nd Proposed Rule removes the exemption for contracts to be performed entirely outside the United States while the preamble explains how the exemption was perpetuated by reliance in drafting on the Defense Federal Acquisition Regulation Supplement (“DFARS”) provisions related to the use of fraud hotline posters. The preamble also notes that contracts to be performed entirely outside the United States were not exempted from all the requirements of the proposed rule. Specifically, the proposed rule:

+applied the proposed debarment/suspension for knowing failure to timely disclose an overpayment on a government contract or violation of Federal criminal law in connection with the award or performance of any government contract or subcontract, to all contracts, whether domestic or overseas.

• applied the policy demanding integrity and honesty to all contractors.

• only exempted contracts to be performed entirely outside the United States from the inclusion of the clause (52.203-XX, Contractor Code of Business Ethics and Conduct).

• had a clause requirement for an internal control system that mandated an internal reporting mechanism by which employees may report suspected instances of improper conduct, and instructions that encourage employees to make such reports on any of the contractor’s contracts or subcontracts, whether domestic or overseas.

The so-called “overseas contracting loophole” has generated a lot of attention in Congress and resulted in conspiracy theories about the “mystery loophole”. It seems highly unlikely that there was any conspiracy or sinister motivation behind the exemption. Rather, it appears to be an exemption perpetuated, as explained in the preamble to the May 2008 2nd Proposed Rule, by reliance on related and existing regulations. Furthermore, although few seem willing to engage in the discussion in the current climate, there are valid issues that could be raised with respect to the application of United States standards of business ethics and conduct overseas, especially on contracts utilizing a foreign workforce and/or foreign subcontractors. Other laws, like the Foreign Corrupt Practices Act (“FCPA”), recognize such challenges. For example, the FCPA has an exception to the antibribery prohibition for payments to facilitate or expedite performance of “routine governmental action.” Indeed, only two minor comments were submitted with respect to the exemption on the rule that became final in November 2007, indicating little reaction to or concern about the exemption at the time.

Contracts for the acquisition of commercial items to be treated like small businesses. The May 2008 2nd Proposed Rule would include the clause in all contracts and subcontracts for the acquisition of commercial items; however, just like small businesses, a formal business ethics awareness and compliance program and internal control system would not be required for such contracts and subcontracts. As such, the following requirements would apply to contracts and subcontracts for the acquisition of commercial items:

  • The requirement for a written code of business ethics and conduct, with a copy provided to each employee engaged in the performance of the contract.
  • The requirement for exercising due diligence to prevent and detect criminal conduct and to promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.
  • The requirement to notify, in writing, the agency OIG, 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 the FCA or a violation of Federal criminal law in connection with the award or performance of the contract or any subcontract thereunder. The requirement related to the FCA is new and discussed below.

The preamble explains that contractors providing commercial items were still subject under the initial proposed rule to debarment or suspension for knowing failure to timely disclose violation of Federal criminal law in connection with the award or performance of the contract or subcontract. According to the preamble, now the requirement to report such violations is explicitly stated in the contract.

Requirement to report violations of the FCA. The May 2008 2nd Proposed Rule now includes as a cause for debarment or suspension the knowing failure to timely disclose not only violation of Federal criminal law in connection with the award or performance of the contract or subcontract, but also a violation of the FCA. Likewise, all contractors, big and small, domestic and overseas, and commercial items, are required to notify, in writing, the agency OIG, with a copy to the contracting officer, whenever the contractor has reasonable grounds to believe that there has been not only a violation of Federal criminal law in connection with the award or performance of the contract or subcontract but also a violation of the FCA. Finally, for contractors required to have an internal control system, the system must provide for timely reporting, in writing, to the agency OIG, with a copy to the contracting officer, whenever the contractor has reasonable grounds to believe that there has been not only a violation of Federal criminal law in connection with the award or performance of the contract or subcontract but also a violation of the FCA. As noted above, the requirement to report violations of the FCA was added at the behest of DOJ, as well as the related debarment and suspension provisions.

DOJ’s January 14, 2008 comments on FAR Case 2007-006 asserted that “it would be an obvious omission not to include the FCA.” Generally, the FCA prohibits knowingly presenting or causing to be presented to the government a false claim for payment. The FCA contains qui tam or “whistleblower” provisions that allow private citizens to file actions against a contractor on behalf of the government alleging fraud against the government. Certainly, the mandatory disclosure requirements raised red flags when limited to violations of Federal criminal law. The concerns are even greater with violations of the FCA added to the mandatory disclosure requirements.

Congress gets involved. In the meantime, Congress has become involved. H.R. 5712, Close the Contractor Fraud Loophole Act, sponsored by Rep. Peter Welch (D-VT), passed the house on April 23, 2008. It was introduced in the Senate on April 24, 2008, as S. 2905, sponsored by Sen. Claire McCaskill (D-MO), and referred to the Committee on Homeland Security and Governmental Affairs. H.R. 5712 and S. 2905 completely remove the exemptions for contracts performed outside the United States and for commercial items. On April 24, 2008, Sen. Hilary Clinton introduced S. 2916, Guaranteeing Real Accountability in Federal Transactions Act. Sen. Clinton’s bill goes farther than H.R. 5712. It applies to contracts over $1,000,000, whether performed inside or outside the United States, including contracts for commercial items. It also requires mandatory disclosure to the agency OIG “within 14 days” after a contractor becomes aware of a violation of Federal criminal law or a significant overpayment. It calls for the establishment of searchable website listing violations and overpayments reported and an annual report on violations and overpayments by the Director of the Office of Management and Budget. Finally, the bill specifically prohibits restrictions on whistleblowing. S. 2905 has also been referred to the Committee on Homeland Security and Governmental Affairs.

We will continue to watch the progress of the proposed rule and related legislation and will provide updates as needed.

No representation is made that the quality of legal services to be performed is greater than the quality of legal services performed by other lawyers.

Disclaimer regarding legal advice – The information in this newsletter should not be construed as legal advice. This information is not intended to create or constitute an attorney-client relationship. For more information or an explanation about the matters discussed in this newsletter, please contact an attorney in this practice group.

IRS Circular 230 Disclosure – To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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