On September 23, 2020, NBC News reported that "[t]he consulting firm where the wife of acting Homeland Security Secretary Chad Wolf is an executive has been awarded more than $6 million in contracts from the Department of Homeland Security [(DHS)] since September 2018." The report stated that "[a]lthough the company has a long history of federal contracts, it did not do work for DHS until after Wolf became the TSA's [Transportation Security Administration] chief of staff in 2017" and raised the specter of conflicts of interest in the federal procurement process, given the family relationship.
Recent months have seen scrutiny of federal funds provided to family members of public officials and other individuals with perceived political connections, often because of concerns that there has been preferential treatment. The Associated Press recently reported that Postmaster General Louis DeJoy's former company, New Breed Logistics, saw its "receipt of federal contracts pick[] up" in 2003-2009, which was "[a]round the same time" that "[h]is wife was a 'ranger' for Bush's 2004 reelection campaign, a designation reserved for donors who tapped their personal and professional networks to bundle more than $200,000 in contributions." In July, USA Today noted that a "law firm employing the wife of Rep. Matt Cartwright, D-Pa., as a partner," a "firm linked to House Speaker Nancy Pelosi's husband, Paul, EDI Associates," and a "shipping company run by the family of Transportation Secretary Elaine Chao" had each received "$350,000 to $1 million" in Small Business Administration (SBA) Paycheck Protection Program loans.
As Congress, regulators, watchdog groups, and the public assess situations like these, government contractors should familiarize themselves with the rules that generally apply when a federal agency considers awarding a contract to a company owned or controlled by the family member of a federal official. While each case is highly fact-dependent, we summarize the relevant law below.
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General Obligation to Avoid Even the Appearance of Preferential Treatment
The Federal Acquisition Regulation (FAR) states that "[g]overnment business shall be conducted in a manner above reproach and, except as authorized by statute or regulation, with complete impartiality and with preferential treatment for none." FAR 3.101-1 (emphasis added). "The general rule is to avoid strictly any conflict of interest or even the appearance of a conflict of interest in Government-contractor relationships." Id. (emphasis added).
The federal government takes this obligation seriously. For example, the U.S. Government Accountability Office (GAO) has explained that a company "can be disqualified from a competition" for government work "based upon the appearance of impropriety . . . even if no actual impropriety can be shown, so long as the determination of an unfair competitive advantage is based on facts and not on mere innuendo or suspicion." International Res. Grp., B-409346.2 et al., Dec. 11, 2014, 2014 CPD ¶ 369 at 9 (emphasis added).
Contract Awards to Federal Employees
The FAR specifically prohibits contract awards to employees of the federal government:
Except as specified in 3.602, a contracting officer shall not knowingly award a contract to a Government employee or to a business concern or other organization owned or substantially owned or controlled by one or more Government employees. This policy is intended to avoid any conflict of interest that might arise between the employees' interests and their Government duties, and to avoid the appearance of favoritism or preferential treatment by the Government toward its employees.
FAR 3.601(a) (emphasis added). The exception to this rule is that "[t]he agency head, or a designee not below the level of the head of the contracting activity, may authorize an exception to the policy in 3.601 only if there is a most compelling reason to do so, such as when the Government's needs cannot reasonably be otherwise met." FAR 3.602.
The GAO has noted that "the policy against contracting with government employees is deep-seated and longstanding because such awards invite criticism as to alleged favoritism and possible fraud." Defense Forecasts, Inc., B-219666, Dec. 5, 1985, 85-2 CPD ¶ 629 at 4. As a result, an agency "is not required to establish with certainty that a government employee has a substantially controlling interest; the agency need only have 'reason to believe' that a government employee has such control." Gurley's Inc., B-253852, Aug. 25, 1993, 93-2 CPD ¶ 123 at 2.
There are also significant ethical rules that govern federal employees' outside activities. The U.S. Office of Government Ethics summarized many of them in Advisory Opinion 06x13: Outside Activities Related to Official Duties, U.S. Off. Gov't Ethics (Dec. 22, 2006).
Contract Awards to Relatives of Federal Employees and Their Companies
The GAO and other federal agencies have applied the foregoing rules and principles to situations in which the close relative of a federal employee (or an entity owned or controlled by such a relative) receives a federal contract, rather than the federal employee herself. As early as 1943, the GAO stated that "payments to or contracts with wives of government employees are open to criticism for possible favoritism and preferential treatment and it has been held that such payments or contracts should not be made except for the most cogent reasons." Warren to the Postmaster Gen., B-33467, Apr. 5, 1943, 22 Comp. Gen. 943.
The GAO upheld a contracting agency's determination that Elogene Thurman's company was ineligible for award because the agency reasonably believed that her husband, a government employee, would "exercise substantial control over the company if it were awarded the contract." See Elogene Thurman, B-206325, May 24, 1982, 82-1 CPD ¶ 487 at 2. The GAO credited evidence of Mr. Thurman's representation of the company and participation in performance under the predecessor contract. See id. at 2-3. Similarly, in Marc Industries, the agency properly excluded Marc Industries where "the person identified as the sole owner of Marc, Nancy Holton, was married to Raul Elvins, a government employee who apparently had substantial control of the business." See Marc Indus., B-246528 et al., Mar. 10, 1992, 92-1 CPD ¶ 273 at 2. The GAO found the agency's determination reasonable, even though Mr. Elvins and Ms. Holton had divorced, Mr. Elvins was no longer an employee of the company, and Mr. Elvins' government employment was not with the contracting agency. See id. at 3.
In another case, the GAO upheld the Environmental Protection Agency's (EPA) exclusion from competition of Revet Environment & Analytical Laboratories, Inc. because the company's president and treasurer, Virginia Taylor, was married to a current EPA employee, Edward Taylor, who "retain[ed] an apparent pecuniary interest in that firm's operations." Revet Env't & Analytical Labs., Inc., B-221002 et al., July 24, 1986, 86-2 CPD ¶ 102 at 1-2. Although Mr. Taylor "transferred all of his shares of stock to his wife, resigned from his position on Revet's Board of Directors, and resigned from his positions as president and treasurer of Revet," the EPA noted that he remained "the sole guarantor of a $550,000 Small Business Administration (SBA) loan to Revet and that this guaranty is secured by mortgages on properties held jointly by Mr. and Mrs. Taylor." Id. at 1-2. As a result, the EPA reasonably concluded "the award of a contract to Revet would create the appearance of a conflict of interest and threaten the integrity of the procurement system." Id. at 2-3.
Some agencies have even developed express policies against contract awards to not only the families of federal employees. See, e.g., FAR 1903.602 ("To avoid potential conflicts of interest or the appearance of preferential treatment, it is the Broadcasting Board of Governors [since renamed the U.S. Agency for Global Media] policy not to award contracts, purchase orders, grants or cooperative agreements to Government employees or their family members or business concerns owned or controlled by Government employees or their family members" (emphasis added)); Heidi Holley, B-211746, Aug. 23, 1983, 83-2 CPD ¶ 241 at 1 (Forest Service reasonably rejected bid based on regulation providing "that contracts generally should not be awarded to members of an employee's family because of the appearance of a conflict of interest.").
Key Takeaways for Contractors
Agencies have broad discretion to reject proposals based on even the appearance of impropriety, including the perception of preferential treatment created by awarding a contract to a government employee's family member, or the relative's company. The above cases show that this is most likely to occur where there is reason to believe that the federal employee is involved in the business operations of his relative's company. Early action and a solid due diligence plan can help avoid the consequences of an overlooked conflict of interest. Contractors should ensure that their internal conflict check procedures include investigation of (1) whether any current employee has retained any form of employment—including consulting positions—with the federal government, and (2) any family relationships that might create a perceived conflict of interest.
