On Nov. 12, 2008, the final “Mandatory Disclosure Rule” was issued, approximately one year after its proposed promulgation. The final rule, effective on Dec. 12, 2008: (1) expands the obligations for a Contractor Code of Business Ethics and Conduct to include mandatory disclosure requirements for certain violations of federal criminal law and for violations of the False Claims Act, (2) establishes a business ethics awareness and compliance program for certain government contractors, and (3) creates a new cause for suspension and debarment based on a contractor’s knowing failure to make a required disclosure under the new rule.
The final rule significantly revises FAR 52.203-13, Contractor Code of Business Ethics and Conduct and now requires contractors to have a written code of business ethics and to exercise due diligence to prevent and detect criminal conduct. If a contractor has credible evidence that a principal, employee, agent or subcontractor has committed a violation of federal criminal law, the contractor must timely disclose all incidents to the inspector general in writing, copying the contracting officer. Neither “credible evidence” nor “timely disclosure” is defined in the clause.
Government contractors are required to establish a “business ethics awareness and compliance program and internal control system.” This requirement does not apply to small businesses or commercial item contracts; however, the rule does require contractors to flow down the substance of the clause to subcontractors exceeding $5 million and 120 days, including commercial item subcontracts.
Lastly, the final rule expands the causes for suspension and debarment to include the knowing failure, by a principal, to timely disclose to the government credible evidence of a violation of federal criminal law, a violation of the False Claims Act, or a significant overpayment on the contract. Neither “timely” nor “significant overpayment” is defined in the final rule.
The new rule creates an affirmative duty for government contractors for disclosures, unlike the industry has seen in the past. Now more than ever, government contractors will need to ensure that compliance is at the heart of their operations. This will include instituting effective compliance programs, enhancing internal controls systems and revamping ethics training. Please do not hesitate to contact Lorraine Campos or any of the lawyers with our Global Regulatory Enforcement Group if you have any questions regarding this final rule.