Under a new rule proposed by the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (the “Councils”), federal contractors may soon be required to adopt a code of business ethics and implement a comprehensive internal compliance program to detect and prevent improper conduct in connection with the award or performance of Government contracts and subcontracts. The proposed rule comes at the urging of the Department of Justice (“DOJ”) and will effectively make the model compliance and ethics program outlined in the U.S. Sentencing Commissions Guidelines mandatory for certain government contractors. Furthermore, the proposed rule would require all government contractors to notify the Office of Inspector General whenever they have reasonable grounds to believe that a violation of criminal law has been committed in connection with a contract or subcontract.

In February of 2007, the Councils published a proposed rule amending the Federal Acquisition Regulation (FAR). That rule proposed requiring federal contractors to implement a code of ethics and business conduct. The comment period on this proposed rule closed on April 17, 2007. Subsequently, on May 23, 2007, DOJ requested that the rule be strengthened to specifically require contractors to establish internal compliance programs and to mandate disclosure by contractors of possible criminal violations. DOJ expressed its concern that the proposed rule left out important elements of the U.S. Sentencing Guidelines that outline the features of an effective compliance and ethics program. Under the Guidelines, companies without established internal ethics and compliance procedures face more severe punishment if convicted of criminal wrongdoing than companies who have implemented such procedures. DOJ believed that the original rule might create a false sense of security by leading businesses to believe they had met all the compliance requirements of the U.S. Government by simply adopting written ethics policies. As a result of DOJ’s request, the Councils decided in November of this year to issue a new proposed rule addressing these concerns. Interested parties may submit written comments to the FAR Secretariat on or before January 14, 2008 to be considered in the formulation of a final rule.

The proposed rule would require any government contractor with a contract or subcontract exceeding $5 million and with a performance period exceeding 120 days to have a written code of ethics and business conduct within 30 days after the contract award. Within 90 days, the contractor must implement an employee ethics training program and an create an internal governance structure to insure adherence to the law and the contractor’s own policies. Responsibility for internal compliance must be assigned to a sufficiently high level of the organization and adequate resources must be allocated to ensure the effectiveness of the program and the internal control systems. The program must provide for discipline, not only where improper conduct has occurred, but also where there has been a failure to take reasonable steps to prevent or detect improper conduct. In addition, the proposed rule would mandate that the contractor’s internal compliance system require full cooperation with any Government agencies responsible for audit, investigation, or corrective actions.

The proposed rule also would require all Government contractors, regardless of the value of their contracts, to immediately notify the Office of Inspector General and the contracting officer whenever they have reasonable grounds to believe that a violation of criminal law has been committed in connection with a contract or subcontract. The rule would further create a new cause for debarment or suspension: a 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 a Government contract or subcontract.

IMPLICATIONS OF THE PROPOSED RULE

While many companies already voluntary employ compliance officers to oversee their internal ethics and corporate governance programs, the proposed rule will make such programs mandatory for many government contractors. Furthermore, all businesses with federal government contracts will be subject to mandatory disclosure of reasonably suspected criminal activity. Moreover, DOJ’s comments should serve as a reminder that all businesses are well-advised to establish an effective internal compliance program to detect and prevent improper or illegal conduct by employees and officers. Having a program in place may not only prevent violations, but will also serve to potentially minimize penalties assessed against the company should an employee or officer engage in criminal misconduct.