Background: The Civilian Agency Acquisition Council and the Defense Acquisition Regulation Council (“the Councils”) had previously proposed to amend the Federal Acquisition Regulation (“FAR”) to require a Contractor Code of Ethics and Business Conduct (FAR Case 2006-007, 72 Fed. Reg. 7588-90 (February 16, 2007)).1 The Councils received a number of comments on the proposed rule and, after analysis of those comments, still intends to issue a final rule from FAR Case 2006-007. However, that final rule will not address mandatory disclosures to the Government or mandatory cooperation with Government agencies responsible for investigation or corrective action.
DOJ’s requests: After the closing date for comments on FAR Case 2006-007, the Department of Justice (“DOJ”) sent a request to the Office of Federal Procurement Policy to open a FAR case requiring contractors to: have a code of ethics and business conduct; establish and maintain specific internal controls to detect and prevent improper conduct in connection with the award of performance of Government contracts or subcontracts; and to notify contracting officers without delay whenever they become aware of violations of Federal criminal law with regard to Government contracts or subcontracts. Although DOJ’s request overlaps, in some respects, the rule proposed under FAR Case 2006-007, several aspects of the DOJ request go beyond the previously proposed rule, particularly with respect to requiring notice to the government of violations. Accordingly, the Councils decided to issue a new proposed rule under FAR Case 2007-006.
The changes under FAR Case 2007-006 include:
- An amendment to the general standards of contractor responsibility at FAR 9.401-1 to include “the contractor’s record of integrity and business ethics” as past performance information to be considered as well as the addition of a specific reference to FAR 42.1501 to ensure that a contractor’s compliance with FAR 52.303-XX in prior contracts is considered.
- An amendment to FAR 9.406-2 and 9.407-2 which adds the following as a new cause for suspension and debarment: “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 any Government contract performed by the contractor or any subcontract thereunder.” FAR 3.1002 would also be amended to add cross-references to these new causes for suspension and debarment.
- Modification of FAR 52.203-XX (as proposed under FAR Case 2006-007) to more closely match the U.S. Sentencing Commission Guidelines Manual guidance on an effective compliance and ethics programs from organizations convicted of a felony or Class A misdemeanor. These modifications include:
- Additional detail in paragraph FAR 52.203-XX(c)(1) with regard to the ongoing ethics and business conduct awareness and compliance program.
- Additional detail in paragraph FAR 52.203-XX(c)(2)(ii)(C) with regard to the requirement for periodic reviews of company business practices, procedures, policies, and internal controls for compliance with the Contractor’s code of ethics and business conduct.
- Converting the stated elements of an internal control system in paragraph FAR 52.203-XX(c)(2) from guidance to mandatory requirements.
- A requirement that the contractor assign responsibility for the internal control program “at a sufficiently high level of the organization and adequate resources to ensure effectiveness of the business ethics awareness and compliance problem and internal control system” and extends the requirement for disciplinary action for improper conduct to cover “failing to take reasonable steps to prevent or detect improper conduct.”
- Modification of FAR 52.203-XX(b)(3) to require notification to the Agency Office of the Inspector General with a copy to the contracting officer whenever the contractor has reasonable grounds to believe that a violation of criminal law has been committed in connection with the award or performance of the contract or any subcontract thereunder.
- Modification of FAR 52.203-XX(c) to mandate the reporting of violations of Federal criminal law in connection with the award or performance of any Government contract performed by the contractor or a subcontract awarded thereunder as part of an internal control program. DOJ asserts that this mandatory disclosure requirement is necessary because too few companies voluntarily disclose suspected violations of Federal criminal law.
Although the Councils intend to issue the final rule under FAR Case 2006-007 without the mandatory disclosure and cooperation requirements, the proposed rule under FAR Case 2007-006 includes mandatory disclosure provisions as described above and also includes a requirement for “[f]ull cooperation with any Government agencies responsible for audit, investigation, or corrective actions.”
Practitioner Tips: The additional requirements relating to Codes of Ethics under FAR Case 2007-006, particularly with regard to mandatory disclosures of overpayments and violations of federal law represent a dramatic expansion of the obligations the government imposes on contractors. Moreover, it is unclear precisely how strong the support is for DOJ’s assertion that “too few” contractors are reporting such matters under current voluntary disclosure programs, which is apparently the primary justification in support of DoJ’s request. Similarly, it will likely prove problematic to determine whether a contractor has provided “full cooperation” with government audit agencies or investigators under the proposed new rules.
- Government contractors and those seeking to do business with the government should review their current Codes of Ethics and compliance to identify what changes, if any, will be necessary to comply with the requirements under FAR Cases 2006-007 and 2007-006.
- Any comments concerning the new changes not included in prior FAR Case 2006-007, as well as comments on the mandatory disclosure and full cooperation examples of an internal control system in the prior FAR case, must be submitted on or before January 14, 2008 by mail to General Services Administration, Regulatory Secretariat (VIR), 1800 F Street NW, Room 4035, Attn: Laurieann Duarte, Washington, DC 20405; by fax to 202-501-4067; or by the Federal eRulemaking Portal at www.regulations.gov.