Tougher Rules: Mandatory Disclosure Regime Raises Stakes for Contractors

Article excerpt

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A new regulatory enforcement regime has now commenced that underscores the Department of Justice's aggressive approach to procurement fraud and dramatically increases the compliance and disclosure obligations of defense contractors.

On Dec. 12, 2008, an amendment to the Federal Acquisition Regulation (FAR) took effect that requires all contractors to timely disclose certain violations of law and overpayments to the government on penalty of suspension and debarment. The new disclosure requirement comes approximately one year after another ethics regulation took effect that requires contractors in certain procurements to establish and implement a code of business ethics and conduct, as well as an extensive internal control system.

Defense contractors also face additional disclosure requirements stemming from the Defense Authorization Act for fiscal year 2009, which will soon require many of them to submit semi-annual reports to the Defense Department that contain specified information for inclusion in an electronic database regarding prior adverse actions or findings of contractor misconduct.

All contractors, regardless of their size or the value of the procurement, must now make a "timely" written disclosure to the office of inspector general at the agency that awarded the contract--with a copy to the contracting officer--whenever, in connection with an award, performance, or closeout of a contract or subcontract, 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 illegal gratuities; or a violation of the civil False Claims Act. Contractors are already obligated to report overpayments under pre-existing payments provisions in the FAR.

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The mandatory disclosure requirement applies both to acquisitions of commercial items and to contracts performed outside of the United States. In addition, it applies to subcontractors as well as prime contractors.

The regulation contains a daunting enforcement mechanism for non-compliance with the new disclosure requirement. Specifically, any contractor or subcontractor may be suspended or debarred upon the "knowing" failure by a "principal" to timely disclose to the government "credible evidence" of the following: a violation of federal criminal law involving fraud, conflict of interest, bribery, or illegal gratuities; a violation of the civil False Claims Act; or "significant overpayments" on a contract. Debarment in the event of non-disclosure is not a certainty, however. The 10 mitigating factors set forth in FAR 9.406-1(a) will continue to apply to determine whether debarment should occur.

The disclosure obligation continues until three years after final payment on a contract. In addition, contractors must disclose known violations relating to an ongoing contract even if they occurred prior to Dec. 12, 2008, the effective date of the regulation. The knowing failure to disclose specified violations remains a cause of action for suspension and debarment for three years after final payment on a contract.

These are the FAR Councils' definition of key terms:

Principal. A "principal" is broadly defined in the regulation to include "an officer, director, owner, partner, or a person having primary management or supervisory responsibilities within a business entity," such as a general manager, plant manager, or the head of a subsidiary, division, or business segment. The FAR Councils stressed that the "definition should be interpreted broadly, and could include compliance officers or directors of internal audit, as well as other positions of responsibility."

Credible Evidence. The FAR Councils expressly noted that until the contractor has determined the evidence to be credible, there can be no "knowing failure to timely disclose. …

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