On November 12, 2008, the Federal Government issued a new regulation, effective December 12, 2008, that requires Government contractors to disclose in writing to the contracting agency’s Inspector General any “credible evidence” they discover of certain criminal violations, violations of the civil False Claims Act, or receipt of significant overpayments related to the contract. These requirements will be implemented in a new mandatory contract clause.

The Government will consider a contractor’s knowing failure to disclose such evidence as grounds for suspension and/or debarment from contracting with the Government. (73 Federal Register 219, 67064-67093).

Mandatory Disclosure

The new regulation requires a company principal, employee, agent, or subcontractor to disclose credible evidence related to the award, performance, or closeout of a Government contract that the contractor:

  • Violated Federal criminal laws on fraud, conflict of interest, bribery, or gratuities, as set forth in Title 18 U.S.C.
  • Violated the civil False Claims Act, 31 U.S.C. 3729-3733.
  • Received significant overpayments from the Government, except for overpayments which result from contract financing described in Federal Acquisition Regulation (FAR) 32.0001.

The new regulation does not define the term “credible evidence,” however, accompanying commentary indicates that this term means a “higher standard” than “reasonable grounds to believe” that a violation has occurred. The requirement to disclose such credible evidence remains in effect until three years after the contractor receives final payment under the contract.

Application: The mandatory disclosure requirement applies to all contracts and subcontracts performed in the United States and outside the United States of more than $5 million, with a performance period of more than 120 days. These include prime and subcontracts for commercial items and for non-commercial items, and those awarded to small businesses. Prime contractors are required to flow-down these requirements in subcontracts of more than $5 million.

Training and Internal Controls

The new regulation also imposes minimum standards for contractor compliance training programs and internal controls. These include periodic compliance training for employees, and an internal control system that facilitates timely discovery and reporting of improper conduct and prompt corrective action.

Application: The compliance training and internal controls requirement applies to all prime and subcontracts performed in the United States and outside the United States of more than $5 million, with a performance period of more than 120 days, except for: (a) contracts and subcontracts for commercial items (supplies and services) as defined in FAR 2.101; and (b) contracts and subcontracts with small businesses. While the training and internal controls requirements do not apply to such contracts, the mandatory disclosure requirement and the new grounds for debarment and/or suspension apply to all Federal Government contractors with contracts above the $5 million threshold, including commercial item contractors and small businesses.

Impact of the New Rule

The mandatory disclosure rule will require all Federal Government contractors and subcontractors with contracts above the threshold to redouble their efforts to ensure they have systems in place to detect criminal conduct and fraud, and a process for determining when self-disclosure to the Government is required. Contractors who are not small businesses or commercial item contractors must also review their compliance awareness training programs and internal controls to ensure that they meet the applicable new standards.