Contractor Fraud – Perhaps We Are a Sorry Lot

Joseph Dyer, Seyfarth Shaw, LLP

“If people are good only because they fear punishment, and hope for reward, then we are a sorry lot indeed.”¹ Perhaps we are a sorry lot. Spurred by the Department of Justice’s concern that Federal contractors are not voluntarily reporting violations of procurement laws, Congress passed the “Close the Contractor Fraud Loophole Act” in 2008.² The Act required that the Federal Acquisition Regulation (“FAR”), the regulation governing Federal procurement, be revised to require reporting of possible violations at the fear of being debarred from contracting with Federal agencies.³

Effective November 12, 2008, the FAR was revised to require Federal contractors to “timely disclose … whenever … the Contractor has credible evidence that a principal, employee, agent, or subcontractor … has committed … [a] violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations … or [a] violation of the civil False Claims Act.”⁴ Given the wide scope of the civil False Claims Act, this requires contractors to report almost any deliberate breach of a Federal contract. A “knowing” failure to disclose is grounds for debarring the contractor from further Federal contracts.⁵

The revisions are not limited to reporting suspected violations. They require that contractors also: (i) have a written code of business ethics and make the code available to each employee engaged in Federal contracts, (ii) “exercise due diligence to prevent and detect criminal conduct,” and (iii) promote an organizational culture that encourages ethical conduct.”⁶

Contractors, other than small business concerns, also establish an “ongoing business ethics awareness and compliance program”.⁷ This program is required to include periodic training of its employees as well a plan to provide training to the contractor’s agents and subcontractors “as appropriate”.⁸ Contractors must also establish an internal control system providing for, among other things, monitoring of the effectiveness of the company’s policies and internal reporting mechanisms.⁹ The contractor must assign a senior management person to oversee the system.¹⁰

Obviously, there is much room for interpretation and judgment. How much evidence of wrongdoing must a contractor possess for it to constitute “credible evidence”? What is the proper scope of the code of conduct? How much diligence to prevent and detect criminal conduct is due? What level of training is “appropriate”? Unfortunately, the Government has not provided much guidance beyond simply noting that the efforts can be tailored to the nature and size of the contractor.¹¹

Larger contractors have, for some time, had internal policies designed to ensure compliance with Federal contracting requirements. The new rule is, in some sense, simply more of the same for them. The larger impact will be on smaller firms who have not traditionally established such internal polices. Small firms will have to struggle as best they can to develop policies and procedures appropriate to the nature and size of their business. Small firms should not skimp here. If the Government becomes aware of improper conduct, the Government will likely take the contractor’s failure to maintain appropriate polices as an aggravating factor in determining what actions to take against the contractor. Since these requirements are implemented via contract provisions, the Government can charge the contractor with breach or otherwise note the contractor’s poor performance regardless of the underlying conduct.¹²  Such action would become a part of the contractor’s permanent record and would very likely adversely affect their ability to obtain Federal contracts in the future. Of some relief to very small contractors, the requirements are only imposed on contractors who have one or more contracts or subcontracts of $5 million or more.¹³

While this new rule has been in effect for a year and one-half, there has not been a large flurry of reported violations. Perhaps it is too early to tell. Perhaps then we are not as sorry a lot as the Act supposed. Perhaps the prior level of reporting reflected not a reluctance to report, but the fact that there was nothing to report. Time will tell. In the meantime, contractors with the Federal Government now have another set of requirements with which they must comply.¹⁴

¹ Albert Einstein, http://www.quoteworld.org/quotes/4229 (last visited Oct. 22, 2010).

(cannot find original source)

² Pub. L. 110-252, Title VI, §§6101-6103, 2008, 122 Stat. 2386 (codified as 41 U.S.C.A. §251 (2008)).

³ Id.

⁴ F.R. Vol. 73, No. 229, pg. 67064 (November 12, 2008). (codified as 48 C.F.R. §52.203-13(b)(3) (2010)).

⁵ 48 C.F.R. §9.406-2(b)(1)(vi) (2008).

⁶ 48 C.F.R. §52.203-13(b)(1) and (2) (2010).

⁷ Id. at 13(c) (2010).

⁸ 48 C.F.R. §52.203-13(c)(1)(i) and (ii) (2010).

⁹ 48 C.F.R. §52.203-13(c)(2) (2010).

¹⁰ 48 C.F.R. §52.203-13(c)(2)(ii)(A) (2010).

¹¹ 48 C.F.R. §52.203-13(b)(d) (1) (2010).

¹² 48 C.F.R. §52.203-13(c)(ii)(E) (2010).

¹³ 48 C.F.R. §3.1004(a) (2008).

¹⁴ 48 C.F.R. §52.203-13 (2010).