The mandatory disclosure rule — which requires federal government contractors to report fraud and overpayments — is in the news again.
The American Bar Association public contract law section procurement fraud committee conducted a meeting recently concerning possible revisions to the rule. Brian Miller, General Services Administration inspector general, held several recent interviews discussing its benefits.
There are few other areas in government contracting, perhaps excluding suspension and debarment, that have received this amount of attention, but generated so little guidance. What is disclosed varies by agency, and by contractor, leaving many to wonder exactly what should be disclosed.
But focusing on the baseline requirement is the wrong approach. Given the vague language of the mandatory disclosure rule, there is a large swath of misconduct or error that arguably does not need to be disclosed. There, the question should not be “Are we required to disclose?” Rather, it should be “What are the benefits of disclosing?”
There are real and underused benefits to disclosure. But the absence of any guidance — real, timely, lessons-learned driven guidance — concerning the impact of mandatory disclosures can cause contractors to spend more time and money analyzing what and how to disclose than the government lost during the underlying, generally small-dollar misconduct.
Why so much confusion? Certainly the mandatory disclosure rule contains challenging, vague standards like “credible evidence” or “timely disclosure” reached after substantial debate and compromise, rendering the rule subject to customer-specific, and contractor-specific interpretation. Federal Acquisition Regulation (FAR) 52.203-13 does not contain definitions for these standards, but the final rule goes to great lengths to provide the reasoning for the inclusion of these standards.
According to the regulatory history, the Department of Justice recommended the term “credible evidence” in the final rule after discussions with industry representatives. Prior to adding this standard in the final rule, the proposed rule included the standard, “reasonable grounds to believe.” Many thought this standard was too low, below the “probable cause” standard needed for more serious activity. Accordingly, the final rule removed the proposed rule standard and added the “credible evidence” standard with the following guidance: “This term indicates a higher standard, implying 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.”
But that is not exactly clear guidance.
A lack of clarity presents contractors with a challenge: How to determine what amounts to credible evidence of a violation. And how to weigh the vaguely worded obligation to disclose with the possibility of tipping the government off to an issue of which it would not otherwise be aware.
And what about contractors in the vast middle market without robust in-house legal capabilities? How should they interpret “credible evidence” of, among other things, a violation of the False Claims Act? That is extremely difficult to accomplish. Perhaps as a result of this confusion, contractors disclose differently. Disclosure frequency is different. The types of issues disclosed are different. And, anecdotally at least, different federal agencies receive disclosures of vastly different categories of issues.
In the first half of fiscal year 2013, the Defense Department received 86 disclosures, and 106 disclosures in the latter half of the fiscal year. Over that same timeframe, the GSA received 22 disclosures, with 17 existing disclosures resulting in more than $8 million in recoveries — and, in some cases, settlements — for the government.
These statistics are incomplete and do not tell the whole story because they are “top line” numbers reported by inspectors general to Congress, rather than designed for analysis by industry. Further, suspensions and debarments — the so-called “teeth” of the mandatory disclosure rule — have been infrequent. Because of the normal time lag in enforcement actions, the government has only recently begun to identify misconduct that should have been disclosed and to apply suspensions and proposed debarments to some of this conduct. So if the language of the rule leads to differing results and statistics cannot be a guide for contractors, then what is the best way to analyze the impact of the mandatory disclosure rule? The answer is found in the impact on stakeholders who receive and process the disclosures.
First line review of disclosures often comes from federal law enforcement or elsewhere on the staff of an inspector general. The reviews generally include assessments of severity, how deeply the investigating agents wish to inquire and how broadly to transmit the disclosed information, or — perhaps the best of all worlds — whether to accept the disclosure, thank the contractor and close the matter. Copies also go to the contracting officer and, in some agencies, the cognizant suspending and debarring officials or their staff. These are powerful communities to alert to problems that may not otherwise come to their attention.
Industry has struggled with this balance of finding when is the right time to disclose, and how much to disclose, to comply with the rule — broad language notwithstanding — and minimize risk. Stated simply, there is substantial concern about the outcome of the process and, as a result, a hesitance to enter it. But that concern is misplaced. For better or worse, government contracting is a heavily regulated industry that can criminalize business mistakes. But it is also an industry that is reactive and dependent upon contractors to self-police.
The mandatory disclosure rule and the processes that have arisen around it offer contractors an opportunity to shape issues, and get out in front of any potential misperceptions that might be delivered by qui tam plaintiffs, federal agents or the staffs of a suspending and debarring official. And that opportunity should be more willingly embraced.
Disclosure program managers have often stated that the disclosure process is a vehicle for contractors to inform the government of an issue, provide enough information to confirm the allegation and, assuming the remediation is there, close the file with minimal difficulty. That, however, oversimplifies the steps involved.
If enough information is given openly, with an opportunity for the government to confirm, the disclosures generally close without much more difficulty than a series of confirming telephone calls and perhaps a discussion or two with the various stakeholder communities. This has been the case with military, civilian and intelligence agencies. And disclosures are generally entered into a central database so the knowledge, and the contractor’s position on the matter, can be shared across the inspector general community if, for example, a one-sided version of events is reported by another source. There is value to being on record early.
Challenges can still arise when trying to craft a disclosure and assessing what information to give and how to articulate it. It is important to remember that the information will be subject to confirmation. Turning in an employee for time mischarging and writing a check to cover the overpayment gets you most of the way there. What will the employee say when interviewed? His or her manager encouraged the practice? Training was not provided? He or she worked overtime and weekends and the timekeeping system would not let that time be input? These items will come out when investigating agents and other officials review the matter. Contractors and practitioners are well advised to consider credibility impacts of a one-sided disclosure.
Investigating agents and auditors are another community worth considering when deciding what and how to disclose. If this were no big deal, why did the contractor not disclose it? That is a common refrain. The legal nuances of this broadly worded regulation do not generally impress investigating agents and auditors, and contractors should not be surprised by this reaction. And an agent with a “gut feeling” that he or she is not getting the full story is a risk that contractors should take seriously. Disclosures, if offered openly and with enough information, can shape agent opinion and save contractors time, trouble and legal fees.
And what about the contracting officer? How does he or she view disclosures? Largely, as an administrative annoyance with more documents to maintain and potentially additional questions from auditors or agents that may need answering. But disclosures are less time consuming, by far, than a full-blown investigation, litigation, or a proposed debarment for failing to disclose.
Despite the passage of time, the mandatory disclosure rule still arouses passions on all sides of the contracting community. When disclosure is required, the choice is obvious. When the facts fall into the vast gray area where disclosure might be required, the analysis is more difficult. Contractors would be well served to assess the impact on all stakeholders of disclosure versus non-disclosure.
Contractors should also consider the contents of their disclosures to ensure the material meets the expectations of all the various stakeholders involved in the process, and the likely second and third order effects of the disclosures on future inquiries. Until further scholarship develops on the topic, we are left only with the anecdotal. Even “abundance of caution” disclosures, where it is not clear whether the mandatory disclosure rule applies, have been beneficial to contractors.