Mandatory Self-Disclosure Proposed for Improper Conduct by Contractors
On February 16, the FAR Council posted a proposed rule in the Federal Register that requires federal government contractors to establish and maintain an internal program that fosters ethics and proper business conduct with respect to federal government contract performance (FAR Case 2006-0001). The rule would be applicable to contractors with a contract in excess of $5 million dollars and a contract performance period of at least 120 days. Its requirements would not arise from commercial item contracts or from contracts performed outside the United States. In general, the proposed rule requires contractors under qualifying contracts to: (1) post inspector general fraud hotline posters; (2) maintain a written code of ethics and business conduct; and, (3) provide employees with appropriate training commensurate with the contractor's overall federal business activities.
Most large federal government contractors already maintain internal policies and controls and provide employee training aimed at ensuring appropriate business conduct, generally, and specifically with respect to federal government business. For companies operating in the federal sector, such programs have been maintained as a matter of best practice to mitigate risk under the False Claims Act, pursuant to guidance contained in the federal organizational sentencing guidelines. However, the proposed rule deserves a careful reading by corporate compliance officers, legal counsel and executives, because it proposes to create a contractual disclosure and cooperation requirement in the event a contractor discovers misconduct under its ethics and business conduct program.
The proposed rule creates a new FAR clause that would be included in qualifying contracts. In relevant part, the clause requires that contractors maintain an internal control system to "facilitate timely discovery and disclosure of improper conduct in connection with Government contracts" which "should provide for ... timely reporting to appropriate Government officials of any suspected violations of law in connection with Government contracts or any other irregularities in connection with such contracts ... [as well as] full cooperation with any Government agencies responsible for either investigation or corrective actions" (emphasis added). The clause provides for withholding of contract payments and award fees in the event a contractor fails to comply.
Most regulators and business executives would widely agree that ethical and proper business conduct is of paramount importance to successful performance in the federal government marketplace. However, the requirement that a contractor must, -- as a matter of contract -- "disclose" any "improper conduct" is a broad and new concept that raises complicated legal questions and business execution risk. In the first instance, the phrase "improper conduct" is patently ambiguous, and could be interpreted to apply to an entire range of activity that is not normally reported by contractors to anyone. For example, sexual harassment claims by employees working on a government contract might become reportable under the proposed rule. Even more onerous, an employee’s actions might be legal, but in violation of a contractor’s written code of ethics, and therefore become reportable as a contractual performance obligation.
Moreover, the reporting requirement under the proposed rule places into question whether a government contractor retains the right not to report itself for a regulatory violation. Government contractors are challenged with a broad array of complicated scenarios that put corporate compliance with regulatory requirements in question. These situations frequently are not reported, but instead are investigated and remedied with process improvements aimed at mitigating recurrence. Under the proposed rule, a contractor may no longer retain the option to not self report. Instead, failing to report might constitute a separate contract performance liability and potential false claim. Intended or not, the overall result of the proposed rule may be to elevate every instance of misconduct to the level of a potential contract or false claim.
Contractors wishing to respond to the proposed rule must do so by April 17.
If you have questions or concerns regarding the impact of this rule on your business, you may contact the Robinette Group at 703-887-2036.