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Climate Change: The New Ethics Compliance and Enforcement Regime for Government Contractors

3050 K St., N.W., Suite 400 Washington, DC 20007 Tel: (202) 342-8803 dlaufman@kelleydrye.com. Climate Change: The New Ethics Compliance and Enforcement Regime for Government Contractors.

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Climate Change: The New Ethics Compliance and Enforcement Regime for Government Contractors

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  1. 3050 K St., N.W., Suite 400 Washington, DC 20007 Tel: (202) 342-8803 dlaufman@kelleydrye.com Climate Change: The New Ethics Compliance and Enforcement Regime for Government Contractors

  2. David H. Laufman, Kelley Drye & Warren LLP Climate Change: The New Ethics Compliance and Enforcement Regime for Government Contractors Thursday, November 20 11:40am – 12:40pm

  3. Newethics and disclosure requirements under the FAR. Aggressive enforcement action by DOJ. Intensified Congressional oversight. Activist Inspector Generals (IGs). An Increasingly Demanding Compliance Environment

  4. Within last year: Final Rule requiring contractor code of business ethics and internal control procedures (Nov. 23, 2007). Final Rule mandating “timely” disclosure of wrongdoing to Government, on penalty of suspension or debarment (Nov. 12, 2008). Surge in Ethics Rulemaking

  5. Oct. 2006: Creation of National Procurement Fraud Task Force, led by DOJ. More than 35 agencies, including FBI and several IG's. Since Task Force created, more than 300 procurement fraud cases initiated that resulted in criminal charges, convictions, civil actions, or settlements. DOJ has charged approximately 50 individuals and companies for contract fraud relating to activities in Iraq, Afghanistan, and Kuwait. In last five years, DOJ reportedly has received nearly 2,000 referrals, investigations, and private party actions under the False Claims Act. More Aggressive Criminal Enforcement

  6. Several oversight hearings on government contract issues during 110th Congress. Within the last 18 months, four bills passed the House of Representatives, including: “War Profiteering Prevention Act of 2007” (H.R. 400, Oct. 9, 2007). “Close the Contractor Fraud Loophole Act” (H.R. 5712, Apr. 3, 2008). Other legislation introduced: “False Claims Correction Act” (S. 2041, voted out of Senate Judiciary Committee, but no floor action). Congressional Activism

  7. Active implementation of Dec. 2003 Attorney General’s Guidelines for IG’s with statutory law enforcement authority. Includes authority to serve subpoenas, seek and execute arrest warrants, make arrests, and carry firearms. IG's Exercising Enhanced Authority

  8. Increase in Federal spending on government contracts from $235 billion in 2001 to over $435 billion in FY 2006. Expansion of opportunities for contract fraud. 12% fewer contracting officers in FY 2006 than in FY 1992. Average contracting officer now supervises twice the volume of contracting dollars as in FY 2000. Financial incentives for qui tam actions. Perceived failure of voluntary disclosure programs. In FY 2007, only three contractors participated in Defense Department’s Voluntary Disclosure Program. Pressure for reforms by public interest groups. Democratic majorities in Congress. Contributing Factors

  9. Advisory policy language. Mandatory inclusion of ethics clauses in certain contracts. In effect as of Dec. 24, 2007. New Requirements for Contractor Code of Business Ethics and Conduct (FAR Case 2006-007)

  10. New Ethics Policy • New FAR Section 3.10 added. • Section 3.1002 sets forth Government’s policy. • All contractors “must conduct themselves with the highest degree of integrity and honesty.” • All contractors “should” have: • A written Code of Business Ethics & Conduct. • An employee Ethics & Compliance Training Program. • An Internal Control System.

  11. Two New Ethics Clauses for Inclusion in Contracts • FAR 52.203-13: “Code of Business Ethics & Conduct” • FAR 52.203-14: “Display of Hotline Poster(s)”

  12. “Code of Business Ethics & Conduct” clause is required if: Contract exceeds $5 million in value; and Period of performance exceeds 120 days. “Display of Hotline Poster(s)” clause is required if: Contract exceeds $5 million* in value; and Agency has a fraud hotline poster or contract is funded with Disaster Assistance Funds. * Agencies can set a lower threshold. Applicability Thresholds (Prime and Subcontracts)

  13. Commercial contracts awarded under FAR Part 12. Contracts performed entirely outside the United States. Exemptions(FAR Case 2006-007)

  14. Within 30 days after award, contractor must: Have a written Code of Business Ethics and Conduct. Provide a copy of the Code to each employee engaged in the performance of the contract. Promote compliance with Code of Business Ethics and Conduct. Contracting officer has discretion to extend 30-day period. Requirements For All Contractors

  15. Within 90 days of contract award, contractor must establish: Ongoing business ethics and business conduct awareness program. Training provided to principals, employees, agents, and subcontractors. Internal control system Contracting Officer has discretion to extend 90-day period. NAICS code considerations for each procurement. Requirements for All Contractors Except Small Businesses

  16. Must: Facilitate “timely discovery” of “improper conduct” in connection with government contracts. Ensure “corrective measures” are promptly implemented. Provide for periodic internal compliance reviews. Provide an internal reporting mechanism that employees can use to report suspected impropriety (e.g., hotline). Provide for internal and external audits. Prescribe disciplinary action for improper conduct. Requirements for Internal Control System

  17. Requires contractor to: Display the pertinent agency or DHS hotline poster at the work site. DHS poster must be displayed if disaster funding used. Display an electronic version of the poster on company website. Contractor can substitute company hotline poster if: It has established an internal reporting mechanism for employees to report “suspected instances of improper conduct.” It has disseminated instructions encouraging employees to make such reports. New FAR 52.203-14 “Display of Hotline Poster(s)”

  18. The compliance program should be appropriate to the: Size of the company. Extent of the company’s government contracting. Compliance Variables

  19. “The Government does not need the code of ethics as a deliverable.” “The [agency] contracting officer is not required to verify compliance, but may inquire at his or her discretion as part of contract administrative duties.” “Review of contractors’ compliance would be incorporated into normal contract administration.” “The Government will not be routinely reviewing [compliance] plans unless a problem arises.” Assessing Contractor Compliance

  20. Clause regarding Code of Business Ethics & Conduct, and internal control system, must be included in subcontracts that (1) have a value of more than $5 million; and (2) a performance period of more than 120 days. “The intent is that the flowdown applies to all subcontracts, including purchase orders.” Exception: if the subcontract is (1) for the acquisition of a commercial item; or (2) is performed entirely outside the U.S. “The contractor is not required to judge or monitor the ethics awareness program and internal control systems of subcontractors – just check for existence.” Flowdown Requirement FAR Case 2006-007

  21. Contractor must include substance of the hotline poster requirement in all subcontracts that exceed $5 million. Exceptions: Subcontract is for acquisition of a commercial item. Subcontract is performed entirely outside of the U.S. Flowdown Requirement for Display of Hotline Posters

  22. Issues deferred in Final Rule in FAR Case 2006-007. Precipitated by May 2007 request by DOJ. DOJ dissatisfaction with history of corporate voluntary disclosure of fraud by government contractors. Modeled on existing corporate compliance standards like Sarbanes-Oxley. Proposed Rule in FAR Case 2007-006(Nov. 2007)

  23. Mandatory disclosure to Government upon reasonable grounds to believe that violation of Federal criminal law occurred. Elements of required internal control systems modified to “more closely match” standards in U.S.S.G. § 8B2.1 – with minimum standards specified. New grounds for suspension or debarment. Contractor’s record of integrity and business ethics now deemed relevant information to be included in past performance information. Key Provisions of Proposed Rule in FAR Case 2007-006

  24. Contractor required to provide “timely” notification to IG and contracting officer in writing “whenever the contractor has reasonable grounds to believe that a principal, employee, agent or subcontractor . . . has committed a violation of the Federal criminal law in connection with the award or performance” of a contract or subcontract. (Emphasis added) False Statements Criminal False Claims Act Mandatory Disclosure of Wrongdoing(Proposed Rule)

  25. Small businesses not required to have formal ethics awareness program and internal controls. Must still have written code of business ethics. Must still report suspected wrongdoing. Ethics and compliance clause not required in solicitations and contracts for: Acquisitions of commercial items under FAR Part 12. Contracts to be performed “entirely outside the United States.” Exemptions Under Proposed Rule

  26. Exemption of contracts performed overseas. Omissions of: Duty to disclose an overpayment. Obligation to disclose violations of civil False Claims Act. Knowing failure to timely disclose as grounds for debarment or suspension. DOJ Criticism of Proposed Rule

  27. Exemption for contracts involving “commercial item” acquisitions. Approximately $70 billion in commercial item acquisitions occurred in FY 2007. In the last three fiscal years, commercial item acquisitions increased at a rate nearly 30 times that of non-commercial acquisitions. Other Criticism of Proposed Rule

  28. Required contractors to report violations of Federal criminal law and overpayments on contracts valued at over $5 million. Including contracts performed overseas and commercial item contracts. Passed House of Representatives on Apr. 23, 2008. Congressional Reaction to Proposed Rule: H.R. 5712 -“Close the Contractor Fraud Loophole Act”

  29. In direct response to criticism of initial Proposed Rule. Published on May 16, 2008. Comment period closed on July 15, 2008. Eliminated exemptions for: Contracts performed outside of the U.S. Contracts for acquisitions of commercial items. Added new grounds for suspension for knowing failure to timely disclose a violation of civil False Claims Act. Debarment available if preponderance of evidence of a knowing failure. Second Proposed Rule in FAR Case 2007-006

  30. Omnibus legislation enacted June 30, 2008. Title VI, Ch. 1: “Close the Contractor Fraud Loophole Act.” Implemented FAR Case 2007-006, as modified. Required FAR to be amended within 180 days of enactment “to include provisions that require timely notification by Federal contractors of violations of Federal criminal law or overpayments in connection with the award or performance of covered contracts or subcontracts.” Including those for commercial items and those performed outside the United States. Supplemental Appropriations Act for 2008

  31. Signed into law on Oct. 14, 2008. Requires inclusion of contract clause regarding conflicts of interest of contractor employees for contracts, tasks, or delivery orders exceeding $500,000. DOD required to propose regulations establishing policy for informing employees of DOD contractor of whistleblower rights and protections. Defense Authorization for FY 2009

  32. Requires DOD to establish contractor integrity database, for contracts over $500,000, for past 5 years, containing info such as: Prior Federal and State criminal convictions regarding contract award or performance. Each Federal suspension and debarment. Each Federal contract and grant that was terminated due to default. Findings of civil liability resulting in monetary fine, penalty, reimbursement, restitution, or damages of $5,000 or more. Certain findings of administrative liability. Certain settlement agreements. Findings that contractor not a “responsible source.” Defense Authorization for FY 2009(Continued)

  33. Before any contract award, DOD official must review database before making responsibility or past performance evaluation. Within 180 days after enactment, DFARS to be amended to require DOD contractors with contracts valued in total over $10 million to submit semi-annual reports including information subject to inclusion in database. Defense Authorization for FY 2009(Continued)

  34. Effective date: Dec. 12, 2008. Follows lively public comment period. Rescinds exemptions for inclusion of ethics clauses in commercial acquisitions and contracts performed overseas. Amends FAR to establish new mandatory disclosure regime and new grounds for suspension and debarment. Final Rule in FAR Case 2007-006(Nov. 12, 2008)

  35. Contractors must: Exercise due diligence to prevent and detect criminal conduct. Otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. General Standards of Conduct and Ethics Culture

  36. Ethics clause at FAR 52.203.13 must now be included in qualifying contracts (and subcontracts) for acquisitions of commercial items and contracts to be performed outside U.S. But commercial contracts still exempt from requirements for “awareness” program and internal control system. Contract Clause Exemptions Eliminated

  37. All contractors must “timely disclose” in writing to the agency IG that awarded contract, with copy to contracting officer, whenever, in connection with award, performance, or closeout of contract or subcontract, contractor has “credible evidence” that a principal, employee, agent, or subcontractor has committed: Violation of Federal criminal law involving fraud, conflict of interest, bribery, or illegal gratuities; or Violation of civil False Claims Act. Applies to large and small contractors. Obligation to report overpayments already exists in FAR. Mandatory Disclosure of Wrongdoing

  38. Mandatory disclosure requirement applies to acquisitions for commercial items and contracts to be performed outside of U.S. With flowdown to subcontracts. Exemptions Eliminated

  39. Not defined in regulation. Mere filing of qui tam action, by itself, is not credible evidence of violation. Internal investigation contemplated: A “higher standard” than previously proposed “reasonable grounds to believe,” “implying that the contractor will have the opportunity to take some time for preliminary examination of the evidence to determine its credibility for deciding to disclose to the Government.” “Credible Evidence”

  40. Obligation to disclose continues until 3 years after final payment on contract. Contractor must disclose violations relating to ongoing contract even if they occurred prior to Dec. 12, 2008, effective date of Final Rule. Knowing failure to timely disclose violation remains cause of action for suspension or debarment for 3 years after final payment on a contract. Duration of Disclosure Requirement

  41. Knowing failure by a principal to timely disclose to the Government, in connection with the award, performance, or closeout of a Government contract performed by the contractor or a subcontractor there under, credible evidence of: Violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations; Violation of civil False Claims Act; or Significant overpayments on contract. Other than overpayments resulting from contract financing payments. Applies to all contractors regardless of contract value or duration. New Grounds for Suspension and Debarment

  42. Notwithstanding the new mandatory disclosure requirement, the ten mitigating factors in FAR 9.406-1(a) will continue to be used in proceedings to determine if debarment should occur. Availability of Mitigating Factors in Debarment Proceeding

  43. For suspension: Upon “adequate evidence” of a knowing failure by principal to timely disclose credible evidence of: Violation of Federal criminal law concerning award or performance of contract or subcontract. Violation of civil False Claims Act; or Significant overpayment on a Government contract. For debarment: If “preponderance of evidence” of a knowing failure by principal to timely disclose credible evidence of same conduct. Standards for Suspension and Debarment

  44. “Principal” must have knowledge in order for mandatory disclosure to be applicable. Defined to include “an officer, director, owner, partner, or a 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 Councils: “[D]efinition should be interpreted broadly, and could include compliance officers or directors of internal audit, as well as other positions of responsibility.” “Principal”

  45. Not defined in Final Rule. FAR Council comments only that “knowing” refers to “the failure to disclose. . . . The principals are only required to disclose what they know.” “Knowing”

  46. No separate definition in Final Rule. FAR Councils referred respondents to existing descriptions in current FAR provisions. Focus: “This rule is aimed at the type of overpayment that the contractor knows will result in unjust enrichment, and yet fails to disclose it.” “Significant” overpayment: “[I]mplies more than just dollar value and depends on the circumstances of the overpayment as well as the amount.” “Overpayment”

  47. Measured from date of contractor’s determination that evidence is credible. Or from effective date of rule, if credible evidence of violation known prior to contract award. Timeliness of Contractor Disclosure

  48. Contractor has “some time for preliminary examination of the evidence to determine its credibility before deciding to disclose to the Government.” No obligation to conduct “complex investigation.” Must take only “reasonable steps” that “contractor considers sufficient to determine that the evidence is credible.” DOJ comment: IG or contracting officer expected to encourage contractor to complete its internal investigation and make a full report of findings. Timeliness of Contractor Disclosure (Continued)

  49. FAR Council comment: “[T]he question of timely disclosure will not come up unless the Government independently discovers that there has been a significant [violation] to be disclosed that the Contractor knew about and elected to ignore.” Timeliness of Contractor Disclosure(Continued)

  50. “Until the contractor has determined the evidence to be credible, there can be no ‘knowing failure to timely disclose.’” “It is unlikely that any contractor would be suspended or debarred absent the determination that a violation had actually occurred.” Centrality of Credibility Determination

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