On November 12, 2008, the FAR Councils published final rules amending various provisions of the Federal Acquisition Regulations to strengthen and expand the recently enacted requirements for a contractor code of business ethics and compliance program. Among other key provisions, and in addition to the current requirement of disclosure of “significant overpayment” as previously established by the FAR Councils, the new rules require government contractors to “timely” disclose to the responsible federal agency OIG and federal contracting officer whenever they have “credible evidence” of (1) a violation of certain Federal criminal laws; and (2) a violation of the civil False Claims Act. The new rules go into effect on December 12, 2008, and apply to all Federal government contracts executed after the effective date that are expected to exceed $5,000,000 in value, and that require more than 120 days to perform. For contracts entered prior to December 12, 2008, a violation of the new mandatory disclosure rules still can serve as the basis for suspension and debarment for up to three years after final payment under the contract is made. See 73 Fed. Reg. 67064 (Nov. 12, 2008).  

These new mandatory disclosure requirements have been added as an amendment to FAR 52.203-13, Contractor Code of Business Ethics and Conduct, which must be included in all contracts and subcontracts expected to exceed $5,000,000 in value, and taking 120 days or longer to perform. See 48 CFR (“FAR”) 3.1004.  

The new rules provide, in relevant part, that  

The Contractor shall timely disclose, in writing, to the agency Office of the Inspector General (OIG), with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of this contract or any subcontract thereunder, the Contractor has credible evidence that a principal, employee, agent, or subcontractor of the Contractor has committed –

(A) A violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code; or

(B) A violation of the civil False Claims Act (31 U.S.C. 3729-3733).  

The final rule also implements the “Close the Contractor Fraud Loophole Act,” Public Law 110-252, Title VI, Chapter 1, and incorporates suggestions received from the Department of Justice, both of which called for the elimination of the overseas contracts and commercial items exceptions to these mandatory disclosures that existed in the rule as initially proposed. Now, all federal government contracts in excess of $5,000,000, requiring longer than 120 days to perform and issued after December 12, 2008, impose mandatory disclosure requirements. However, the small business and commercial items exemptions are retained with respect to the internal controls and compliance program requirements that were added to the FAR late last year. See FAR 52.203-13(c).  

The FAR Councils adopted the “credible evidence” standard over the “reasonable grounds to believe” standard proposed in earlier versions of the rule. And while the phrase “credible evidence” is not expressly defined in the rules, the Supplementary Information accompanying the rules provides some limited guidance to the contracting community:  

[T]he Councils believe that using the standard of “credible evidence” rather than “reasonable grounds to believe” will help clarify [the timely disclosure requirement] because it implies that the contractor will have the opportunity to take some time for preliminary examination of the evidence to determine its credibility before deciding to disclose to the Government. Until the contractor has determined the evidence to be credible, there can be no “knowing failure to timely disclose.” This does not impose upon the contractor an obligation to carry out a complex investigation, but only take reasonable steps that the contractor considers sufficient to determine that the evidence is credible.

On top of the most recent major changes to the FAR in the ethics and compliance area, the new mandatory disclosure rules are aimed at protecting the integrity of public procurement. Yet they provide another pitfall for the unwary government contractor. Understanding these new requirements, including carefully documenting the investigation into alleged misconduct covered by the rule, and the decisionmaking process used to determine whether a disclosure should or should not be made, maximizes a contractor’s defense against the Government’s prosecution for non-disclosure. As such, we recommend an internal evaluation of each existing contract that may exceed the threshold, and advise that now would be an excellent time to evaluate a company’s internal ethics and compliance programs.