On November 14, 2007, the federal government issued a proposed rule that aims to significantly expand existing compliance and reporting obligations for vendors and service providers that conduct business with the federal government. 72 Fed. Reg. 64019 (Nov. 14, 2007). The proposed rule—which is being urged by the Department of Justice’s Procurement Fraud Task Force—would significantly expand upon an earlier ethics/business conduct proposal (see 72 Fed. Reg. 7588 (Feb. 16, 2007) by, among other things:

  • requiring contractors to report any violations of federal criminal law by its personnel or subcontractors in connection with the award or performance of government contracts; 
  • establishing that a failure to disclose an overpayment on a government contract may constitute a cause for suspension or debarment from government contracting; 
  • including a “blacklisting”-type of provision in which “the contractor’s record of integrity and business ethics” would become part of the “present responsibility” and past performance information that may be evaluated in the contractor selection process; and 
  • mandating “full cooperation” with government audits and investigations concerning noncommercial item contracts valued at more than $5 million.

If finalized as currently written, the proposal will greatly increase the administrative costs and risks to contractors while providing the government with significant additional leverage in carrying out its oversight functions. The government has established a January 14, 2008, deadline for public comments on the proposal. The following summarizes the proposed rule in more detail.

Compliance Program – Generally

As a starter, the proposed rule would require that contractors “conduct themselves with the highest degree of integrity and honesty,” a requirement that already exists in the Department of Defense contracting regulations. The rule further provides that contractors should maintain a written code of business ethics and conduct, as well as a training program and internal control system that facilitates the timely discovery of improper conduct. The requirements become mandatory and much more specific for non-commercial item contracts valued at more than $5 million and performed in the United States. For example, these contracts would contain terms requiring that the contractor periodically conduct internal reviews to detect criminal conduct, assess the effectiveness of the organization’s business ethics awareness and compliance program, and implement any necessary program modifications to reduce the risk of criminal conduct. These requirements have previously been incorporated into the Federal Sentencing Guidelines’ standards for effective compliance programs; the proposed rule will make them contractual obligations under the FAR.

Requirement to Report Criminal Conduct

The most significant change called for by the proposed rule involves provisions that would require contractors to self-report the criminal conduct of its own employees or those of a subcontractor. First, the proposal provides for a new cause of suspension or debarment from government contracting for a contractor’s knowing failure to timely disclose a violation of federal criminal law in connection with the award or performance of a government contract. Notably, suspension or debarment under the federal rules may also impact an organization’s eligibility for certain state and local government contracting opportunities.

Second, contracts valued at more than $5 million (and for other than commercial items) would require the contractor to notify the agency Office of Inspector General “whenever the contractor has reasonable grounds to believe that a principal, employee, agent, or subcontractor of the Contractor” has violated federal criminal law in connection with the award or performance of the contract or any subcontract thereunder. The proposed rule does not discuss what constitutes “reasonable grounds” or elaborate upon the nexus between the perceived criminal conduct and the federal contract so as to trigger the reporting requirement.

Importantly, silence in the face of an affirmative duty to report has been held by a number of courts to represent the equivalent of a “false statement.” Therefore, in addition to prosecuting the underlying alleged criminal conduct, a failure to disclose might be used by the government as a basis to impose additional penalties under the False Claims Act or to argue that the contract is void ab initio under common law precedent. See United States v. Mississippi Valley Generating Co., 364 U.S. 520 (1961).

Failure to Disclose Overpayments Is New Cause for Suspension

The proposal would also create a new cause for suspension and debarment from government contracting for a contractor’s knowing failure to timely disclose an overpayment on a government contract. What constitutes an “overpayment” under a contract often is subject to reasonable debate. The proposal, if adopted as written, may lead many contractors to disclose situations that arguably reflect overpayments even where the contractor has reasonable arguments otherwise.

Duty of “Full Cooperation” with Auditors and Investigators

The proposal would also require contractors to maintain an internal control system that “shall” provide for “full cooperation” with auditors and investigators. The proposed rule does not address the extent to which “full cooperation” would be impacted by the withholding of records that are beyond the government’s audit rights or of documents to which the contractor claims attorney-client privilege. At least one agency suspension and debarment official in the past has indicated his agency’s view that “full cooperation” entails waiver of the attorney-client privilege.

Evaluation of the Contractor’s Record of Integrity and Business Ethics

Finally, a contractor’s record of integrity and business ethics would now become part of the contractor’s performance record that is evaluated as part of the contract award process. This information may be used to determine whether an offeror is “presently responsible” so as to be eligible for award and as a discriminator among competing offers in the evaluation of offerors’ past performance information. As currently written, the record of integrity and business ethics is not confined to performance under government contracts and could include, for example, a contractor’s record of compliance with labor, employment, tax, environmental, antitrust, and consumer protection laws. A similar so-called “blacklisting” rule was issued by the Clinton administration in 2000 and challenged by the U.S. Chamber of Commerce in U.S. District Court. The rule later was revoked by the Bush administration.