Ethics and anti-corruption rules for defence contractors in USA

Ethics and anti-corruption

When and how may former government employees take up appointments in the private sector and vice versa?

Federal employees in the executive branch of government are restricted in performing certain post-employment ‘representational’ activities for private parties, including:

• a lifetime ban on ‘switching sides’, that is, representing a private party on the same ‘particular matter’ involving identified parties on which the former executive branch employee had worked personally and substantially for the government;
• a two-year ban on ‘switching sides’ on a somewhat broader range of matters that were under the employee’s official responsibility;
• a one-year restriction on assisting others on certain trade or treaty negotiations;
• a one-year ‘cooling-off’ period for certain ‘senior’ officials barring representational communications to and attempts to influence persons in their former departments or agencies;
• a two-year ‘cooling-off’ period for ‘very senior’ officials barring representational communications to and attempts to influence certain other high-ranking officials in the entire executive branch of government; and
• a one-year ban on certain former high-level officials performing certain representational or advisory activities for foreign governments or foreign political parties.

In addition to the above restrictions, ‘procurement personnel’ are also prohibited from receiving compensation from certain private contractors for a period of time after being responsible for procurement action on certain large contracts as government officials. Procurement personnel also have additional rules on reporting ‘contacts’ from prospective employers who are government contractors. For defence contractors looking to hire a ‘covered’ current or former government official (generally, an official who has participated ‘personally and substantially’ in the procurement or management of a DoD contract or programme valued in excess of US$10 million), DFARS 252.203-7000 requires that the official must seek, and the contractor must review, ‘a written opinion from the appropriate ethics counselor regarding the applicability of post-employment restrictions to the activities that the former official is expected to undertake on behalf of the contractor’.

In the legislative branch, members of the House and senior legislative staff have a one-year cooling-off period, as well as restrictions on representations on behalf of official foreign entities and assistance in trade negotiations. US Senators are subject to a two-year cooling-off period in which they may not lobby Congress after leaving the Senate.

How is domestic and foreign corruption addressed and what requirements are placed on contractors?

To address domestic corruption, 18 USCA section 201, a criminal statute, prohibits bribery and gratuities. Both the government official and the offeror of the bribe or gratuity are responsible under the statute. Contractors that violate criminal statutes related to bribery or illegal gratuities can have their contract terminated and may face suspension or debarment from government contracting altogether. In addition, under FAR 52.203-13, the Contractor Code of Business Conduct and Ethics, contractors are required to disclose to the government any credible evidence that the contractor has committed a violation of this and certain other laws. The government also has limitations on gifts and hospitality that can be given to government employees by contractors. As a general rule, government employees are prohibited from (directly or indirectly) soliciting or accepting ‘gifts’ from a ‘prohibited source’ or that are given because of the employee’s official position. Government contractors fall within the definition of ‘prohibited source’.

The primary tool to address foreign public corruption is the Foreign Corrupt Practices Act (FCPA or the Act). In general, the FCPA’s anti-bribery provisions prohibit offering to pay, paying, promising to pay or authorising the payment of money or anything of value to a foreign official to influence any act or decision of the foreign official in his or her official capacity or to secure any other improper advantage to obtain or retain business. There are also books-and-records and internal control provisions applicable to companies that are considered ‘issuers’ of US securities as defined by the Act.

There are various bases for the US Department of Justice or SEC to assert jurisdiction under the FCPA, including status as a US company, US citizen, US permanent resident, or foreign company or person whose conduct either occurs within the United States or that issues US securities. Contractors should maintain robust compliance programmes appropriate for the size and risk profile of their organisation and make sure that the programme is operating effectively by updating and testing it on an ongoing basis.

What are the registration requirements for lobbyists or commercial agents?

The Lobbying Disclosure Act requires individuals who are paid for lobbying at the federal level to register with the Secretary of the Senate and the Clerk of the House. Lobbying firms, self-employed lobbyists and organisations employing lobbyists must file regular reports of lobbying activity. A lobbyist includes any person who:

• receives financial or other compensation for lobbying in excess of US$3,000 per three-month period;
• makes more than one lobbying contact; and
• spends 20 per cent or more of his or her time over a three-month period on lobbying activities on behalf of an employer or individual client.

All three criteria must be met to require registration.

In addition, the Foreign Agents Registration Act (FARA) requires every agent of a foreign principal, not otherwise exempt, to register with the Department of Justice and file forms outlining its agreements with, income from, and expenditures on behalf of the foreign principal. These forms are public records and must be supplemented every six months. FARA also requires that informational materials (formerly propaganda) be labelled with a conspicuous statement that the information is disseminated by the agents on behalf of the foreign principal. The agent must provide copies of such materials to the Attorney General. The term ‘foreign principal’ includes foreign governments, foreign political parties, a person or organisation outside the United States, except US citizens, and any entity organised under the laws of a foreign country or having its principal place of business in a foreign country.

Are there limitations on the use of agents or representatives that earn a commission on the transaction?

Contractors’ arrangements to pay contingent fees for soliciting or obtaining government contracts have long been considered contrary to public policy because such arrangements may lead to attempted or actual exercise of improper influence (FAR 3.4). By statute, the government:

• requires in every negotiated contract a warranty by the contractor against contingent fees;
• permits, as an exception to the warranty, contingent fee arrangements between contractors and bona fide employees or bona fide agencies; and
• provides that, for breach or violation of the warranty by the contractor, the government may annul the contract without liability or deduct from the contract price or consideration, or otherwise recover, the full amount of the contingent fee.

‘Bona fide agency’ means an established commercial or selling agency, maintained by a contractor for the purpose of securing business, that neither exerts nor proposes to exert improper influence to solicit or obtain government contracts nor holds itself out as being able to obtain any government contract or contracts through improper influence. ‘Bona fide employee’ means a person, employed by a contractor and subject to the contractor’s supervision and control as to time, place and manner of performance, who neither exerts nor proposes to exert improper influence to solicit or obtain government contracts nor holds out as being able to obtain any government contract or contracts through improper influence.