As the government contracting community has witnessed over the last year, the federal government has taken an increased interest in contractor business ethics, as evidenced in new regulations requiring contractors doing business with the federal government to implement a contractor code of business ethics. Pursuant to FAR Subpart 3.10 Contractor Code of Business Ethics and Conduct, contractors are required to establish a written code of business ethics and conduct that includes a business ethics and compliance training program and an internal control system that (1) are suitable to the size of the company and extent of its involvement in government contracting; (2) facilitate timely discovery and disclosure of improper conduct in connection with government contracts; and (3) ensure corrective measures are promptly instituted and carried out.

 In addition to the newly promulgated FAR 3.10, at the request of the Department of Justice and based upon comments to the initial proposed rules, the FAR Councils have announced two additional proposed rules to FAR 3.10 to better mirror a contractor’s obligations under the U.S. Sentencing Commission Guidelines Manual, and to provide more guidance regarding what is to be included in a compliance program and an internal controls system. The proposed rules amend and modify certain portions of the FAR, such as

  • amendment to FAR Part 9 Contractor Qualifications to require contractors to “have a satisfactory record of integrity and business ethics”; 
  • amendment to Part 42 Contract Administration and Audit Services to allow the government to review “the contractor’s record of integrity and business ethics” as a part of an audit review; and 
  • amendment to FAR 3.10 to require the implementation of an ongoing business ethics and conduct awareness and compliance program to include training program and dissemination of information to employees; training conducted under this program shall be provided to the contractor’s principals and employees, and as appropriate, the contractor’s agents and subcontractors.

Furthermore, the proposed revisions also impose additional reporting requirements upon contractors. Under the proposed rules, and as part of a contractor’s written code of business ethics and conduct, a contractor is required to report (1) violations of federal criminal law in connection with the award or performance of the contract or any subcontract thereunder, and (2) violations of the False Claims Act. Finally, as proposed, failure to make such reporting constitutes grounds for debarment or suspension.

Although these proposed revisions have not been finalized, it is evident that the federal government will only increase its regulation of a contractor’s business ethics and, thus, contractors should formalize their business ethics compliance training program and internal control system sooner rather than later and such written policy should consider the following practical considerations:

  • Assignment and responsibility at sufficiently high level of the organization and adequate resources to ensure effectiveness of business ethics awareness and compliance programs and internal control systems; 
  • Reasonable efforts not to include within the organization principals whom due diligence would have exposed as having engaged in conduct that is illegal or otherwise in conflict with contractor’s code of business ethics and conduct; 
  • Periodic reviews of company business practices, procedures, policies and internal controls for compliance:

–– Monitoring and auditing to detect criminal conduct;

–– Periodic evaluation of organization’s business ethics awareness and compliance program; and

–– Periodic assessment of risk of criminal conduct and revisions to reduce risk;

  • Internal reporting system/mechanism such as a hotline that allows for anonymity and/or confidentiality, by which employees may report suspected instances of improper conduct and encouragement of same;
  • Disciplinary action for improper conduct or for failing to take reasonable steps to prevent or detect improper conduct; 
  • Timely reporting to the government; and 
  • Full cooperation with any government agency responsible for audit or investigation.