On Feb. 17, 2009, President Obama signed into law the American Reinvestment and Recovery Act of 2009 ("Recovery Act"), Public Law 111-5. The Recovery Act represents an unprecedented outlay of government funds to support a range of projects related to, among others, renewable energy, infrastructure repair and maintenance, health care, and rural development. The opportunities are numerous for companies, state and local governments, and a variety of nonprofit entities to capitalize on stimulus funds to support research and development activities, construction of facilities, and the provision of goods and services to federal agencies and state and local grant recipients. However, all such funding comes "with strings attached."

Those "strings" are the obligations to comply with a host of laws and regulations. Broadly, any recipient of stimulus monies, whether as a grant recipient, contractor, or sub-recipient or subcontractor, must be prepared to shoulder the burdens of tracking the use of such funds, ensuring that the funds are used only for proper purposes, and following the ancillary rules, such as environmental laws or equal employment opportunity requirements, that do not necessarily arise in the commercial transactions to which contractors and grant recipients may be accustomed.

The following Alert summarizes the steps that government agencies are taking to prevent fraud, abuse, and regulatory noncompliance with respect to stimulus monies; it sets forth the repercussions of failure to maintain compliance, and provides an overview of the steps companies can take to protect the value of their investments in competing for and obtaining stimulus monies.

Enhanced Scrutiny

On June 16, 2009, reporter Ralph Lindeman wrote in the Federal Contracts Report:

A perfect storm of massive federal spending to spur the economy and a new law expanding liability under the False Claims Act has put many unsuspecting companies in the cross-hairs of the Justice Department, plaintiffs' attorneys, and whistleblowers, according to legal experts....

To wit, President Obama signed into law the Fraud Enforcement and Recover Act of 2009 ("FERA"), Public Law 111-21, May 20, 2009. Among other things, this bill appropriates $165 million to federal agencies for the purposes of "investigations and prosecutions and civil and administrative proceedings involving Federal assistance programs and financial institutions." Thus, FERA greatly enhances the resources available to agencies to combat fraud and abuse.

Similarly, individual agencies are undertaking compliance enforcement. For example, on July 7, 2009, the Federal Contracts Report reported that the Office of Federal Contract Compliance Programs ("OFCCP") in the U.S. Department of Labor would conduct at least 450 compliance evaluations of new and existing contractors that receive funds appropriated by the Recovery Act. The OFCCP's evaluations will focus on whether federal contractors are complying with applicable affirmative action and equal employment opportunity requirements. The reviews will focus primarily on construction contractors. This is just one example of how federal agencies are mobilizing to scrutinize contractors and grant recipients, and hold them accountable for compliance with federal laws and regulations.

How Compliance Breakdowns Occur

In our experience, the most common sequence of events that leads to compliance breakdowns is something like this:

  • Historically commercial company or privately funded nonprofit agency does business with the government for the first time
  • Contracts are signed, work is performed, money is paid – "business as usual" occurs
  • The firm then is subject to a government audit, or a disgruntled employee reports, rightly or wrongly, that the firm may have violated a law
  • The firm is caught without any defense when the government finds that it signed an agreement under which the firm agreed to comply with myriad legal requirements; that the firm received funds through a contract or grant; and that the firm ignored its compliance obligations

Even if no clear wrongdoing is detected, the firm can face penalties for non-compliance. And if wrongdoing is detected, the firm's exposure may be compounded by a finding that it "willfully disregarded" or otherwise ignored its compliance obligations.

Consequences of Compliance Breakdowns

Probably the least severe consequence of a compliance breakdown is that a compliance breakdown is a breach of contract, and it gives the government an immediate excuse to terminate a contract or grant agreement for default. Therefore, compliance breakdowns place at risk income streams on which a contractor or grant recipient is relying. Moreover, depending on the facts surrounding a breach of a contract or grant agreement, a firm may owe money to the government to compensate for the firm's noncompliance.

In addition, cases decided under the False Claims Act statutes, which provide for civil and criminal penalties when parties submit false information to the government to obtain money, has established the "implied false certification" doctrine. Often, contracts or grants do not involve lump-sum payments. Rather, they require contractors or recipients to submit periodic claims for payment. These claims generally require contractors or recipients to certify expressly that they are in compliance with all requirements of the contract or grant agreement. Even when express certifications are not required, courts have, in a number of cases, implied such certifications—hence, the "implied false certification" doctrine. The civil False Claims Act allows the government to recover double or treble damages for such false certifications, and the criminal False Claims Act allows fines or more severe criminal penalties to be applied to violators.

A pernicious aspect of the False Claims Acts is that it encourages whistleblowers to report violations and allows whistleblowers to share in any recovery of damages or settlement to which their reports lead. Unsurprisingly, disgruntled former employees often make such reports, and an industry of lawyers and law firms that specialize in bringing such cases has arisen. Therefore, firms that seek to do business with the government must appreciate that the very employees tasked with ensuring compliance may fail in their duty, report their failures to the government, and share in any awards of damages against the firms. Below, we explain that firms can take compliance steps to prevent such a sequence of events from occurring. The severity of possible penalties associated with False Claims Act liability justify the "up front" expense of taking such compliance steps.

In addition to risks associated with breach of contract and False Claims Act liability, contractors and grant recipients found not to have observed their compliance duties face the risk of suspension or debarment from performing contracts with, or receiving grants from, the government. Typically, if one agency finds that a contractor is subject to suspension or debarment, other federal agencies will observe such suspension or debarment. Related to this, if an agency learns that a contractor or grant recipient has failed to observe its compliance obligations, then the agency will give the contractor "bad marks" when contacted regarding the firm's past performance should the firm seek additional contracts or grants. In addition, unfavorable information an agency reports regarding a firm could lead to a finding that the firm is non-responsible, which would preclude the firm from being awarded many contracts or grants.

Firms should pay special attention to compliance issues where they submit claims to be reimbursed for costs under contracts or grants. Hosts of accounting regulations may apply to those submissions, which may only be referenced in passing in a contract or grant agreement. The submission of any cost or pricing data to the government should be preceded by the adoption of financial controls within a firm to ensure compliance. Currently, the systems that generate such information within most organizations are largely automated. Therefore, adoption of appropriate financial controls before submitting information to the government for cost-reimbursement can "nip" noncompliance "in the bud."

With respect to all consequences for breakdowns, but particularly for those that relate to whether a contractor "disregarded" its compliance obligations or was otherwise "non-responsible," the ability to make a showing that the contractor tried to achieve compliance can be quite valuable in mitigating penalties. In order make such a showing, the best evidence tends to be written policies and procedures addressing compliance, as well as written records showing: (1) that employees received training; (2) that employees understood their training; and (3) that procedures to "backstop" and check employees' individual compliance were followed. The practices listed in the following section outline steps firms can take to create the records necessary to establish that they have "cultures of compliance" should the need to do so arise.

How to Avoid the Breakdowns

The prescription for avoiding breakdowns in compliance is simple, but it is not easy. Basically, firms must accomplish two things: (1) they must know their compliance obligations; and (2) they must meet those obligations. Practical steps that firms can take to give themselves the best chance to avoid noncompliance, or to mitigate the fallout from breakdowns, include:

Review all contracts and grant agreements, and determine, or hire experts to determine, the universe of terms and conditions with which the firm must comply

Draft and adopt policies and procedures spelling out all the requirements, stating that it is the company's policy to follow all the requirements, and setting forth the precise actions that personnel in particular positions must take to ensure compliance

Include in the policies and procedures steps whereby compliance will be audited periodically and, where there is concern that employees will disregard certain duties (or commit fraud), compliance will be checked by responsible managers on a transaction-by-transaction basis

Conduct thorough compliance training with all employees, and maintain written acknowledgements from employees that they completed training. Where feasible, administering a test of some sort to ensure comprehension will further protect the company in the event that a compliance breakdown occurs.

Conclusion

It is critical that firms receiving Recovery Act monies, whether via grants, contracts, or other vehicles, understand the various laws and regulations with which they must comply. Firms must tailor internal policies and procedures to ensure compliance in the context of their unique structures and cultures. Noncompliance can result in penalties that erase the value of any stimulus funds received. By creating and following appropriate policies and procedures from the outset, companies can increase the chances that their government-funded programs are a success.