National Procurement Fraud Task Force Releases Final White Paper  

On January 12, 2009, the Project on Government Oversight (POGO) publicly released a June 9, 2008 white paper created by the National Procurement Fraud Task Force Legislation Committee, which detailed the Committee's recommendations for combating procurement fraud. We previously reported the Legislation Committee's July 2007 draft of this white paper, which, according to POGO, "went through an intense year-long vetting process" before being issued in final form. See Fraud Task Force Reform Proposals, August 2007 Government Contracts Issue Update (available at www.wileyrein.com/reform_proposals).

The final white paper comes on the heels of recent FAR revisions imposing new minimum internal control requirements and mandatory disclosure obligations on federal contractors. See 73 Fed. Reg. 67064 (Nov. 12, 2008). Although the recommendations in the white paper significantly overlap the new FAR rules (which had been issued as proposed rules when the white paper was completed), the white paper includes additional proposed legislation that would expand the scope of the recent FAR changes. Given the supervening release of the final FAR rules in November 2008, between the white paper's completion and its public release, it is unclear whether the additional proposed legislation has been overtaken by the new FAR rules or represents additional reforms that the Legislation Committee intends to pursue.

To the extent the white paper reflects legislative changes that the Committee still recommends, even in the wake of the FAR changes, some of its recommendations are substantial and, if included in legislation without further revision, could present compliance challenges for government contractors.

Requiring Ethics Codes and Internal Control Systems.

The Legislation Committee proposed a "prohibition" on contract awards to any government contractor that does not have an adequate internal compliance program, ethics code or internal controls in place. The proposed legislation would apply to any contractor with "aggregate sales under government contracts" that exceed $5 million in the year prior to the potential award. It suggests a contractor could have adequate programs in place if it is "implemented within 30 days after award of the contract."

The recent FAR revisions require such internal programs only if the contractor is awarded a single contract that exceeds $5 million and a 120-day performance period, and contractors have 90 days from contract award to implement new programs. Moreover, small businesses and commercial item contractors are excepted from the requirements to maintain a business ethics awareness and compliance program and internal controls system (although they must maintain a written code of business ethics and conduct). Thus, the Legislation Committee's recommendation would apply stricter programming and controls requirements to far more government contractors, imposing additional costs on small businesses and commercial item contractors, and potentially limiting entry into the industry.

Reporting Requirements.

The white paper recommends legislation requiring mandatory disclosure including, but not limited to, "all instances where violations of criminal law are related to Government contracting" within "30 days after discovery of the conduct by responsible contractor officials." In addition to actual "violations," however, the rule elsewhere suggests that contractors would also have to disclose "any suspected violations of law, regulations, or other requirements . . . in connection with [Government] contracts."

The FAR mandatory disclosure rules require disclosure of "credible evidence" of violations, which was the standard that the FAR Councils settled upon after considerable harsh industry comment on the initially proposed "reasonable grounds to believe" reporting standard. On its face, the white paper's "suspected violation" reporting standard seems arbitrarily low, and would subject contractors to unnecessary over-reporting or a vague reporting standard, if implemented. For example, would a contractor have to report every hotline call it receives or internal investigation that it initiates?

The FAR rule also demands disclosure of fewer, more tailored violations—including violations of the False Claims Act and "Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code"—in addition to "substantial overpayments" (which the white paper also addresses). The FAR disclosure requirement does not have a 30-day reporting deadline, but instead requires "timely" disclosures, which affords the contractor an "opportunity to take some time for preliminary examination of the evidence to determine its credibility before deciding to disclose to the Government." The white paper's rigid 30-day reporting deadline may not provide the same flexibility for internal investigation.

Reporting Contract Breaches.

The recommended legislation would also impose mandatory self-disclosure of any "suspected violations of . . . contractual provisions," potentially requiring contractors to self-report breaches of contract entirely unrelated to any fraud, ethics or compliance concerns. This proposed requirement would give inspectors general and agency suspension/debarment officials who are charged with policing the disclosures and violations an unprecedented role in the contract administration process, and create endless risk of suspension/debarment for contractors whenever there is an unreported breach of contract.

In addition to the mandatory disclosure recommendations, the white paper also advocates other changes that carry over from the draft report, including:

  • Revising the Federal Sentencing Guidelines to provide for increased penalties for persons convicted of procurement or grant fraud by defining loss to include the value of any impacted federal contract or grant, plus reprocurement costs, but prohibiting credits against the loss calculation for the value of any property or services rendered;
  • Expanding Office of Inspector General (OIG) subpoena authority to include compelled interviews, tangible objects and electronic evidence;
  • Detailing OIG counsel employees to the Department of Justice (DOJ) to assist in prosecuting procurement fraud, to provide OIG counsel "valuable litigation training experience" and "pursue otherwise sound procurement fraud cases" that DOJ sometimes declines to prosecute because of smaller dollar amounts involved and resource constraints;
  • Substantial extension and reform of the Program Fraud Civil Remedies Act (PFCRA) to provide all OIG offices greater authority to utilize the Act and prosecute their own cases, as well as increasing the threshold for the PFCRA from $150,000 to $500,000;
  • Extending criminal conflict of interest provisions in 18 U.S.C. § 208 to government contractors that perform key acquisition functions, and prohibiting contractors from receiving work where there is an organizational conflict of interest based on a relationship with an acquisition contractor, apparently regardless of firewalls or other mitigation steps;
  • Reinstating audit rights over pricing information for GSA multiple award schedule contracts; and
  • Establishing a national procurement fraud database.  

The white paper is available on POGO's website at http://www.pogo.org/pogo-files/alerts/contract-oversight/co-ca-20090112.html.