New FAR Ethics Requirements

1. New FAR Ethics Requirements Richard W. OehlerPerkins Coie LLP1201 Third AvenueSuite 4800Seattle, WA 98101(206) 359-8419roehler@perkinscoie.com

2. New FAR Ethics Requirements • FAR Subpart 3.10 - requires a written code of business ethics and conduct • Effective December 24, 2007 • Recommended for all federal contractors • Mandatory for all contracts and subcontracts exceeding $5 million and having an expected performance period of at least 120 days

3. Mandatory Ethics Code – Exceptions • Exceptions • Commercial item contracts and subcontracts • Contracts performed outside of the United States • Does not apply to existing contracts – only future contracts

4. Ethics Code – Requirements • Within 30 days of award of a covered contract, a contractor must: • Have a written code of business ethics and conduct • Provide a copy of the code to each employee engaged in performance of the contract • Promote compliance with the code

5. Ethics Code - Requirements • Throughout contract performance, a contractor must: • Display fraud hotline posters except if the contractor has established a mechanism by which employees can report suspected instances of misconduct and provided instructions that encourage employees to make such reports • If the company maintains a website as a method of providing information to employees, the posters must be displayed on the website

6. Ethics Code – Requirements • Within 90 days of contract award, a contractor must (unless a small business): • Establish a formal training program • Not defined in the regulations • Establish an internal control system

7. Internal Control System • Internal Control System • Must facilitate timely discovery of improper conduct in connection with government contracts • Ensures corrective measures are promptly implemented • Appropriate to the size of the company

8. Internal Control System • Components of an Internal Control System • Periodic reviews of company business practices, policies and procedures to ensure compliance with the contractor's code of business ethics • Internal reporting mechanisms, such as a hotline, allowing employees to report suspected misconduct • Internal and/or external audits • Disciplinary action for misconduct

9. Flow down Obligations • Prime contractor must flow down these requirements to subcontracts valued over $5 million and having a performance period greater than 120 days • Prime contractors are not required to evaluate or monitor the ethics awareness program of subcontractors, but should verify that the subcontractor has a program • Contracting officers are not required to verify compliance, but may inquire at their discretion

10. Proposed Mandatory Disclosure • Contractors have an opportunity to voluntarily disclose wrongdoing, but have never been required to disclose • Proposed rule would require mandatory disclosure of wrongdoing by contractors and full cooperation with Government inquiries • Disclose to CO and OIG any violations of criminal law in connection with contracts or subcontracts valued at $5 million or more

11. Proposed Mandatory Disclosure • Required to cooperate fully with any government agencies responsible for audit, investigative or corrective actions • The Government believes there is a need for mandatory disclosures • Only 5 voluntary disclosures to DOD in 2007 • High profile procurement-related misconduct • Contractor misconduct under Iraq and Gulf Coast reconstruction contracts • Increasing number of False Claims Act cases

12. Proposed Mandatory Disclosure • Industry concerns • Counter to the corporate self-governance policy in government contracting • Attorney-client privilege could be waived as a result of compelled disclosure • May infringe upon constitutional rights and legal protections of employees • May chill employee willingness to report suspected misconduct and have a negative impact on morale