On November 12, 2008, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (the Councils) issued a final rule, amending the Federal Acquisition Regulation (FAR) that: (i) imposes a requirement on government contractors to disclose to the government possible violations of criminal law or violations of the civil False Claims Act whenever a contractor has “credible evidence” of such violations; (ii) adds as a ground for suspension and/or debarment a contractor’s failure to disclose such possible violations or significant overpayments by the government; and (iii) imposes additional requirements on contractor codes of business ethics and conduct, business ethics awareness and compliance programs, and internal control systems.  As enunciated by the Councils, the objective of the regulations “is to emphasize the critical importance of integrity in contracting and reduce the occurrence of improper or criminal conduct in connection with the award and performance of federal contracts and subcontracts.” The revised regulations, which are summarized below, become effective on December 12, 2008.

New Contractual Mandatory Disclosure Requirement 

Revisions made to the FAR 52.203-13(b)(3)(i) Code of Business Ethics and Conduct provisions require a government contractor to timely disclose to the procuring agency’s Office of the Inspector General, with a copy to the contracting officer, whenever, in connection with the award, performance or closeout of a government contract performed by the contractor or a subcontract awarded thereunder, the contractor has credible evidence that a principal, employee, agent or subcontractor of the contractor has committed: (i) a violation of federal criminal law involving fraud, conflict of interest, bribery or gratuity violations found in Title 18 of the United States Code; or (ii) a violation of the civil False Claims Act.  

FAR 52.203-13 must be included in all contracts expected to exceed $5 million with a performance period of at least 120 days in accordance with FAR 3.1004(a). Contractors performing commercial items contracts and contracts outside of the United States no longer are exempted from the requirement to have a Code of Business Ethics and Conduct. Also, flowdown of FAR 52.203-13 is required in all subcontracts meeting the stated thresholds. 

The Councils advised that the mandatory contractual disclosure requirement applies to contracts that include revised FAR 52.203-13, and extends for three (3) years after final payment on the contract. For such contracts, “timely disclosure” is measured from the date of determination of credible evidence or the date of contract award, whichever event occurs later.

The Councils further advised that the term “credible evidence” ultimately was chosen as the trigger for disclosure because this term implies that the contractor will have an opportunity to take timely and reasonable steps to conduct a preliminary examination to determine the credibility of the evidence before deciding to disclose to the government.  “Until the contractor has determined the evidence to be credible, there can be no ‘knowing failure to timely disclose.’”

New Ground for Suspension and/or Debarment

The new regulations provide that, regardless of whether the contractual requirements of FAR 52.203-13 are applicable to a contract, a contractor may be suspended and/or debarred if a principal of the contractor knowingly fails to timely disclose, in connection with the award, performance or closeout of a government contract performed by the contractor or a subcontract awarded thereunder, credible evidence of: (i) a violation of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the UNITED STATES Code; (ii) a violation of the civil False Claims Act; or (iii) a significant overpayment on the contract, other than overpayments resulting from contract financing payments as defined in FAR 32.001.  FAR 3.1003(a)(2); FAR 3.1003(a)(3); FAR 9.406-2(b)(1)(vi); FAR 9.407-2(a)(8).

A failure to make such timely disclosure constitutes a cause for suspension or debarment for a period of three (3) years after final payment on the contract. 

However, a failure to disclose is not a ground for suspension or debarment unless a “principal” of the contractor knowingly fails to timely disclose the wrongdoing.  A “principal” is defined as an officer, director, owner, partner, or person having primary management or supervisory responsibilities within a business entity (e.g., general manager, plant manager, head of a subsidiary, division, or business segment, and similar positions).  FAR 2.101(b)(2); FAR 52.203-13(a). Although not expressly stated in the FAR definition, the Councils noted that the definition should be interpreted broadly, and could include compliance officers or directors of internal audit, as well as other positions of responsibility. In limiting the disclosure requirement to “principals,” the Councils concurred with a comment received on the proposed rule that a failure to disclose should not be a basis for suspension or debarment when only low-level employees have knowledge of a violation and do not inform their superiors. 

Also noteworthy is the fact that an unreported overpayment must be “significant” to invoke the suspension/debarment provisions. The term “significant” is not defined.  

Failure to make “timely disclosure” of credible evidence of a violation or overpayment as a cause for suspension and/or debarment is measured from the date of determination by the contractor that the evidence is credible, or from the effective date of the rule, whichever event occurs later. Accordingly, the violation or overpayment may predate the effective date of the rule (December 12, 2008), in that such violation or overpayment may have occurred with regard to any government contract that is still open or for which final payment was made within the last three (3) years.

New Code of Business Ethics and Conduct, Business Ethics Awareness and Compliance Program, and Internal Control System Requirements

In addition to the mandatory disclosure requirements discussed above in connection with the new FAR 52.203-13(b)(3)(i) Code of Business Ethics and Conduct requirements, the rule also imposes new requirements regarding contractor codes of business ethics and conduct, business ethics awareness and compliance programs, and internal control systems. These requirements apply to contracts and subcontracts expected to exceed $5 million with a performance period of at least 120 days, except that the business ethics awareness and compliance programs and internal control systems requirements do not apply to small business contractors or commercial items contracts.  

Revised FAR 52.203-13(c)(1) requires a government contractor to implement a business ethics awareness and compliance program that provides for effective communication, training and dissemination of information appropriate to an individual’s respective roles and responsibilities. Such training is to be provided to a contractor’s agents and subcontractors, as appropriate, in addition to contractor principals and employees.

Revised FAR 52.203-13(c)(2) requires a government contractor to implement an internal control system that includes mandatory elements (as opposed to suggested elements as set forth in the prior version of the regulation). Included among these mandatory internal control system elements is a mandatory disclosure provision that, like the disclosure requirement provided for in FAR 52.203-13(b)(3)(i), requires timely disclosure, in writing, to the procuring agency’s Office of the Inspector General, with a copy to the contracting officer, whenever, in connection with the award, performance, or closeout of any government contract performed by the contractor or any subcontract thereunder, the contractor has credible evidence that a principal, employee, agent, or subcontractor of the contractor has committed: (i) a violation of federal criminal law involving fraud, conflict of interest, bribery or gratuity violations found in Title 18 of the UNITED STATES Code; or (ii) a violation of the civil False Claims Act.

The Councils advised that the mandatory disclosure requirement of the internal control system only becomes effective upon establishment of the internal control system, but noted that a violation could have occurred with regard to any government contract that is still open or for which final payment was made within the last three (3) years and thus could predate establishment of the internal control system. Therefore, the Councils further advise that “timely disclosure” as required by the internal control system is measured from the date of determination by the contractor that the evidence is credible, or the date of establishment of the internal control system, whichever event occurs later.

In addition to the mandatory disclosure requirement, revised FAR 52.203-13(c)(2) also sets forth several other mandatory elements to be included in a contractor’s internal control system. While many of these elements generally may be categorized as assignment of responsibility, reasonable due diligence, review and monitoring, reporting and disciplinary measures, one element deserves special mention. Per revised FAR 52.203-13(c)(2)(ii), a contractor’s internal control system must provide for the contractor’s full cooperation with any government agencies responsible for audits, investigations, or corrective action. “Full cooperation” means disclosure to the government of information sufficient for law enforcement to identify the nature and extent of the offense and the individuals responsible for the conduct, and requires a contractor to provide timely and complete responses to government requests for documents and access to employees with information. FAR 52.203-13(a).  However, “full cooperation” does not require waiver of any attorney-client privilege, protections afforded by the attorney work product doctrine attorney privileges, or Fifth Amendment rights. Nor does such cooperation restrict a contractor from conducting an internal investigation, or from defending a proceeding or dispute arising under a contract or related to a potential or disclosed violation.

Contractor Action Items

Clearly, the revised regulations impose significant new compliance, control, review and disclosure obligations on contractors. Contractors should review and revise, as appropriate, their ethics and compliance programs and internal control systems to ensure that they fully incorporate these new requirements. Contractors also should take steps to ensure that their principals, employees, agents and subcontractors are aware of and properly trained as to such obligations. Agreements also should be reviewed to ensure that the new requirements are flowed-down therein. 

Craig S. King
king.craig@arentfox.com
202.857.8938