Ethics Resource Center

Published: February 18, 2009

The Policy Report
By Paula J. Desio, ERC Chair on Ethics Policy

New Rules for Federal Contractors: You Must Disclose Wrongdoing

As part of its ongoing efforts to promote the “highest degree of integrity and honesty” in the procurement process, the federal government now requires self-disclosure of misconduct by all companies performing government contracts.

The new rule flows down from government contractors to their subcontractors and suppliers, extends to companies providing commercial items as well as specific performance contracts, and applies outside the United States, when certain value and duration thresholds apply.

A year of controversy surrounded consideration of the new requirement that companies make a “timely disclosure” and “fully cooperate” with the government when violations of certain criminal and the civil False Claims Act are detected.  Failure to notify the contracting officer and the appropriate Inspector General now constitutes grounds for contractor suspension and debarment from future government business.  

Voluntary Policing Rejected

The Department of Justice advocated aggressively for this new rule because it views the existing voluntary disclosure program for contractor misconduct as increasingly inadequate.  The voluntary disclosure program was instituted in 1986 by the presidentially appointed Packard Commission investigating the defense procurement scandals of the 1980s.  The Commission favored self-governance and a partnership with companies committed to business integrity as the most promising mechanism to foster contractor compliance with ethics and integrity standards.  This view has now been soundly rejected by the Federal Acquisition Regulations Council, the agency responsible for government procurement rules.

 Recognizing that it has made a “sea change” in policy and practice, the FAR Council determined that the voluntary disclosure program has been largely ignored for the past decade It justified its view on the basis of statistics on the existing program’s infrequent use and information from various Inspector General offices that most of their investigations did not relate to matters that had been voluntarily disclosed by contractors.

Cooperation Required

These revised business integrity rules for contractors also require full cooperation once disclosure is made to the government.  Cooperation is defined as “information sufficient for law enforcement to identify the nature and extent of the offense and the individuals responsible for the conduct.”  This includes timely and complete responses to government auditors’ and investigators’ requests for documents as well as access to employees.  These standards are similar to those initially set out by the federal organizational sentencing guidelines, and the FAR Council commendably built on these and other existing standards to promote a greater measure of uniformity in federal rules and standards.

Wisely, the FAR Council also included a specific provision that contractors are not required to waive their attorney-client privilege when they disclose wrong-doing. 

Business Community Input

DOJ’s broad initial proposal was also narrowed in two ways that are more favorable to the contractor community.  First, in the face of substantial comment and concern about a potentially limitless landscape of rules that could be broken by contractors and the lack of resources to identify them all, the FAR Council limited the substantive criminal violations that must be disclosed to violations of laws involving fraud, conflicts of interest, and bribery and gratuity prohibitions.   This realignment is internally consistent with the jurisdiction of the Inspectors General who will be receiving the mandatory disclosures.

Second, after further discussions with industry representatives, DOJ supported a change to its own proposal that would give contractors more opportunity to examine potential violations and decide if a mandatory disclosure is appropriate.  The standard that was originally proposed -- that a contractor must disclose when it has “reasonable grounds to believe” a criminal violation has occurred -- was replaced with a higher standard of “credible evidence.” This change is intended to give contractors adequate time for preliminary examination of the information it can develop, typically through an internal investigation, although such a formal step is not an actual requirement.

Potential Protection for Companies

There is a nugget of  potentially helpful news in all of the paper surrounding the new mandatory disclosure rules  Buried in the hundred-plus page discussion of public comment and policy considerations preceding its release of the final rule last November 12, the FAR Council specifically  noted that “[e]xisting DOJ guidelines addressing corporate prosecution standards, while certainly not providing amnesty, suggest that if a company discloses such [designated] violations, the prosecution will be of individuals responsible for the violation, not the entire organization.”

While the FAR Council cannot legally bind Justice, this observation arguably reflects a policy preference by the procurement authorities that company prosecution is not necessary when self-policing is taken seriously.  This conclusion seems a sensible and well-motivated trade-off for the FAR Council’s adoption of  DOJ’s initiative to make a fundamental shift from voluntary to mandatory disclosure. 

Obstacles En Route

In the immediate future, many practical questions  will have to be addressed about implementing processes and procedures to ensure full compliance with the new requirements.  Fundamentally, contractors concerned with their obligation to inform their subcontractors of these new “flow-down” requirements will legitimately ask if their own commitment to business integrity includes some training and information exchange with their smaller suppliers, research partners, and overseas contractors.  Major U.S. companies and organizations have undertaken this effort in the past without the looming specter of mandatory disclosure, and have developed sound methods to accomplish this goal.

The business ethics community can serve as a valuable and accessible ally for advancing these newest rules to foster improved integrity in the workplace.  In these times of cost-cutting and restraint, “lessons learned” should be shared. ERC will be working with partners to advance this effort.

 

In This Issue

• The Policy Report By Paula J. Desio, ERC Chair on Ethics Policy
  - New Rules for Federal Contractors: You Must Disclose Wrongdoing
  - Federal Whistleblower Rights Increase Under the Stimulus Law
  - Criminal Liability: What’s on the Horizon?
  
• Guest Column By Andrea Bonime-Blanc
  Governance, Risk, Ethics and Compliance: Time for a Seat at the Executive Table
• Column By Patricia J. Harned, Ph.D. President, ERC
• One Vision of Ethics by Phillip B. Goldberg, ERC Vice President/Development
• January 2009 Fellows Meeting