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The Correct Choice by FAR: Ethics and Compliance Programs for Federal Government Contractors

In fiscal year 2016, the U.S. Government awarded a total of $471.38 billion in contracts, up 7.7% from $437.72 billion in FY 2015. Government contractors in Maryland, Virginia, and the District of Columbia account for a significant share of these funds.

But while federal contracts can bring prosperity for businesses and their employees, they can also bring peril. If employees bribe a contracting officer, engage in a kickback scheme with a subcontractor, violate conflict of interest rules, or file false certifications, the consequences can be devastating. Culpable employees can be criminally prosecuted and sentenced to jail. Corporations can face criminal fines and forfeitures and massive civil penalties under the False Claims Act. Agencies can suspend contracts and debar entities and key personnel.

The Federal Acquisition Regulation

All things considered, the government would prefer not to have to resort to these drastic remedies. Since 2008, the Federal Acquisition Regulation (FAR) has mandated that contractors on larger federal contracts establish and maintain an ethics and compliance program. The FAR requires the insertion of a clause entitled “Contractor Code of Business Ethics and Conduct” in solicitations and contracts where the value is expected to exceed $5 million and the performance period is 120 days or more.

Once an entity wins the contract, a substantial laundry list of obligations kicks into place within 30 days after contract award (unless the contract officer establishes a longer time period). The contractor must, among other things:

  • Have a written code of business ethics and conduct in place.
  • Make the code available to all employees involved in performing the contract.
  • Promote a culture that encourages ethical conduct and compliance.
  • Provide timely written disclosure when it obtains credible evidence of an ethics violation.
  • Cooperate with an audit, investigation, or corrective action related to contract fraud.
  • Display “hotline” posters relate to ethics and reporting issues.

The disclosure and cooperation requirements are critical. A contractor must do more than exercise “due diligence to prevent and detect criminal conduct.” If it becomes aware of credible evidence that one of its principals, employees, agents, or subcontractors has paid a bribe or gratuity, become entangled in a conflict of interest, or violated the False Claims Act, it must timely disclose the evidence in writing to the agency’s contracting officer and Office of Inspector General. (This provision does not require the entity to waive attorney-client privilege or override employees’ Fifth Amendment protections against compelled self-incrimination.)

Creating Programs that Fit

Recognizing that ethics and compliance issues vary from business to business, the FAR does not contain a one-size-fits-all model ethics awareness and compliance program. Generally speaking, however, the program should begin by requiring ethics and compliance training for all agents, principals, and subcontractors. The firm should establish internal controls with mechanisms to discovery inappropriate conduct in the timeliest possible manner. Anonymous internal reporting of violations should be enabled through a hotline or similar system. Systems should be devised to reward compliant behavior and punish individuals who act inappropriately. Specific operational issues that should be addressed, including: product quality and safety; fair competition practices; accurate record-keeping; hiring/equal opportunity/harassment issues; relations with customers, suppliers, and foreign officials; political activities and conflicts of interest; and cybersecurity and handling of classified, proprietary, and confidential information.

Just in case those obligations didn’t put enough on contractors’ plates, in 2015 the FAR was amended to add a new requirement related to human trafficking that is highly relevant to contractors who perform work overseas.

For contracts with an estimated value of more than $500,000 for supplies acquired, or services to be performed, outside the United States (other than commercial off-the-shelf items), contractors must certify their compliance with and monitoring of human trafficking issues. Significantly, contractors may be held liable for the actions of all tiers of subcontractors and agents – a daunting prospect in a world of extensive global supply chains. Prohibited conduct ranges from the worst forms of forced labor and quasi slavery to procuring commercial sex acts, destroying or confiscating employees’ identity and immigration documents or failing to provide return transportation, fraudulent recruitment practices, and providing housing that does not meet host country standards. Like the older requirements discussed earlier, violations of the human trafficking provisions must be promptly reported to relevant contracting officer and Inspector General.

As experienced government contractors know, the “Christian Doctrine” provides that if the FAR requires that a clause be included in a contract, but that clause is omitted, the missing clause is deemed to be included anyways. Translation: there’s no way for larger contractors to negotiate their way around these ethics, compliance, and human trafficking provisions, and reporting obligations. Instead, contractors may wish to retain legal counsel or independent consultants to draft the required codes and provide the necessary training to their employees.

Stuart Berman has prosecuted and defended federal criminal cases involving bribery, kickbacks, and conflict of interest, and civil cases brought under the False Claims Act. He is available to provide ethics and compliance training and to assist with crafting ethics and compliance programs. For more information, contact Stuart at 301-657-0729 or saberman@lerchearly.com.

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This content is for your information only and is not intended to constitute legal advice. Please consult your attorney before acting on any information contained here.

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