COMPLIANCE AND MANDATORY DISCLOSURE OBLIGATIONS FOR GOVERNMENT CONTRACTORS Bob Wagman Jeff Vaden May 17, 2017
WHAT WE ARE GOING TO COVER Federal Sentencing Guidelines for Organizations Background Recent Developments FAR Requirements for Contractors - Ethics and Compliance Program Applies to contractors and subcontractors Differences in requirements based on type of contract (e.g., fewer requirements commercial item contracts and small businesses) Mandatory Disclosure Requirements What must be disclosed and when Consequences for failing to make a required disclosure 2
GOVERNMENT CONTRACTING IS A SEPARATE AND HIGHLY-REGULATED INDUSTRY Treating the Government like any other customer is like playing a football game with soccer rules. You will not only lose the match, but you will be carried off the field. 3
Government money today is in everything.... And, of course I exaggerate by using the word everything, but only a little. Transcript of Oral Argument at 36:6-9, Allison Engine, Inc. v. United States ex. rel Sanders, No. 07-214 (Feb. 26, 2008) (Breyer, J.) Federal government also funds programs through grants, cooperative agreements, loans, etc Similar Compliance and Disclosure Requirements for Federal Grants (2 C.F.R. 200.113) Federal government is the single largest consumer of goods and services in the world Total federal spending is approximately 20% of GDP $472 billion in contracts awarded (FY16) 4
MOST FUNDS AWARDED BY AGENCY - FY 2017 Agency Funds Awarded 1. Department of Health and Human Services $409,437,413,338 2. Social Security Administration $321,952,805,985 3. Department of Defense $68,919,075,408 4. Department of Veterans Affairs $68,500,467,437 5. Department of Education $41,206,107,569 6. Department of Agriculture $23,231,990,558 7. Department of Housing and Urban Development $17,691,550,188 8. Department of Transportation $17,324,536,909 9. Department of Energy $14,366,582,266 10. Department of Homeland Security $9,311,587,480 5
RELATIONSHIP BETWEEN FEDERAL ACQUISITION REGULATION REQUIREMENTS AND FEDERAL SENTENCING GUIDELINES FAR requirements for compliance programs were patterned on the US Federal Sentencing Guidelines, but are not identical Preamble clarified that the [US Federal Sentencing Guidelines] are the source for the FAR text, but the FAR text is intentionally not adopting them verbatim. FAR established mandatory requirements, as opposed to recommendations FAR rules are more detailed and include obligations not set forth in the Guidelines (e.g., display of hotline posters, mandatory reporting) Sentencing Guidelines provide some recommendations not specifically required in FAR 6
U.S. SENTENCING GUIDELINES In 1991, first established Federal Sentencing Guidelines for Organizations Amendments in 2004 and 2010 Included mitigation for organizations with an effective compliance program Also mitigation for cooperation 7
SENTENCING GUIDELINES EFFECTIVE COMPLIANCE PROGRAM 8B2.1. Effective Compliance and Ethics Program (a) To have an effective compliance and ethics program, for purposes of subsection (f) of 8C2.5 (Culpability Score) and subsection (b)(1) of 8D1.4 (Recommended Conditions of Probation - Organizations), an organization shall (1) exercise due diligence to prevent and detect criminal conduct; and (2) otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. Such compliance and ethics program shall be reasonably designed, implemented, and enforced so that the program is generally effective in preventing and detecting criminal conduct. The failure to prevent or detect the instant offense does not necessarily mean that the program is not generally effective in preventing and detecting criminal conduct. 8
USSG - ELEMENTS TO AN EFFECTIVE COMPLIANCE PROGRAM 1. Establish Standards and Procedures to Achieve and Maintain Compliance With the Law 2. Ensure High Level Responsibility for Implementation 3. Avoid Delegating Responsibility to Known Problem Persons 4. Communicate and Train Effectively All Personnel and Agents 5. Monitor/Audit Effectively- Establish Internal Reporting Mechanisms 6. Discipline Violators Appropriately and Effectively 7. Respond Promptly to Problems Remedy Issues Appropriately, Ensure No Repeat Offenses 9
COOPERATION CREDIT GUIDELINES/DOJ POLICY 8C2.5(g) can lower culpability score if misconduct is voluntarily disclosed and cooperation with investigation. Justice Department encourages companies to conduct internal investigations and disclose the relevant facts to authorities. Prosecutors may consider a company s timely and voluntary disclosure in evaluating its overall cooperation. 10
CIVIL FALSE CLAIMS ACT- 31 U.S.C 3729(A)(2) REDUCED DAMAGES If the court finds that (A) the person committing the violation of this subsection furnished officials of the United States responsible for investigating false claims violations with all information known to such person about the violation within 30 days after the date on which the defendant first obtained the information; (B) such person fully cooperated with any Government investigation of such violation; and (C) at the time such person furnished the United States with the information about the violation, no criminal prosecution, civil action, or administrative action had commenced under this title with respect to such violation, and the person did not have actual knowledge of the existence of an investigation into such violation, the court may assess not less than 2 times the amount of damages which the Government sustains because of the act of that person. 11
DEVELOPMENT OF FEDERAL ACQUISITION REGULATION RULES At the Justice Department s request, in May 2007, US government created mandatory requirements for contractor codes of conduct, ethics training and internal control systems In separate rules (Nov. 2007 and May 2008), government proposed mandatory disclosure of federal criminal violations In June 2008, Congress weighed in with the Close the Contractor Fraud Loophole Act... required extension of portions of FAR 3.10 to commercial-item contracts and contracts performed outside US 12
FINAL FAR RULE Issued November 12, 2008 Final Rule on Mandatory Disclosure and Contractor Business Ethics effective December 12, 2008... lengthy Preamble (73 Fed. Reg. 67,064) Also includes expanded requirements for contractor compliance programs Finalized requirement for mandatory disclosure required immediate attention from federal contractors Implemented as both a contract clause (FAR 52.203-13), a required business practice (FAR 3.1003), and a separate cause for debarment/suspension (FAR 9.406-2(b)(1)(vi)/9.407-2(a)(8)) Required to be Flowed Down to Subcontractors if Subcontract is Valued at More than $5.5 million and a Performance Period of More than 120 Days 13
REQUIREMENT FOR A CODE OF BUSINESS ETHICS AND CONDUCT 52.203-13 required in contracts over $5.5m and performance over 120 days Within 30 days after contract award, unless the Contracting Officer establishes a longer time period, the Contractor shall Have a written code of business ethics and conduct; Make a copy of the code available to each employee engaged in performance of the contract. The Contractor shall Exercise due diligence to prevent and detect criminal conduct; and Otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. 14
FAR COMPLIANCE PROGRAMS -- ADDITIONAL REQUIREMENTS FAR 52.203-13 (c) does not apply to small businesses or contracts for commercial items. An ongoing business ethics awareness and compliance program. An internal control system. o o Responsibility at a sufficiently high level and adequate resources to ensure effectiveness. Reasonable efforts not to include an individual as a principal, whom due diligence would have exposed as having engaged in conduct that is in conflict with the Contractor s code of business ethics and conduct. Periodic reviews of company business practices, procedures, policies, and internal controls An internal reporting mechanism, such as a hotline, which allows for anonymity or confidentiality Disciplinary action for improper conduct or for failing to take reasonable steps to prevent or detect improper conduct. 15
THE MANDATORY DISCLOSURE RULE Included as an Element of Required Code of Business Conduct in FAR 52.203-13 Requires: The Contractor shall timely disclose, in writing, to the agency Office of the Inspector General (OIG), with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of this contract or any subcontract thereunder, the Contractor has credible evidence that a principal, employee, agent, or subcontractor of the Contractor has committed (A) A violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code; or (B) A violation of the civil False Claims Act (31 U.S.C. 3729-3733). 16
FAR 3.1003 REQUIREMENTS Whether or not the clause at 52.203-13 is applicable, a contractor may be suspended and/or debarred for knowing failure by a principal to timely disclose violations to the Government until 3 years after final payment on a contract. A contractor may be suspended and/or debarred for knowing failure by a principal to timely disclose credible evidence of a significant overpayment. Notice of overpayments are disclosed to contracting officer rather than OIG 17
CONSEQUENCES OF FAILING TO SELF-REPORT AS REQUIRED BY MANDATORY DISCLOSURE RULE Failing to comply with the FAR mandatory disclosure requirement is an express cause for Debarment. (FAR 9.406-2(b)(1)(vi)). Could result in failure to have an approved business system. The rule is contained in a contract clause; failure to abide by it can constitute a breach of contract and be a basis for default. 18
SUSPENSION AND DEBARMENT Government can exclude from all government funded programs (contracts, grants, etc.) for a period of time Both companies and individuals can be debarred Affiliates can also be debarred for misconduct Usually for set period of time (e.g., 3 years) Suspension is a temporary exclusion from federal programs Imposed when the government needs to take immediate actions to protect the government s interest Usually is imposed pending an investigation/proceeding Discretionary action very limited judicial review 19
SPECIFIC TERMS TIMELY Timely is not defined in the regulation Expressly rejected a specific number of days for making a disclosure, and instead implies a reasonable under the circumstances approach Relies on both the credible evidence standard the knowing failure trigger to inform reasonableness This does not impose an upon the contractor the an obligation to carry out a complex investigation, but only to take reasonable steps that the contractor considers sufficient to determine that the evidence is credible. 20
SPECIFIC TERMS CREDIBLE EVIDENCE Credible Evidence in not defined in the regulation Replaced reasonable grounds to believe standard used in earlier versions of the FAR rule The term implies that the contractor will have the opportunity to take some time for preliminary examination of the evidence to determine its credibility before deciding to disclose to the Government. 21
SPECIFIC TERMS FULL COOPERATION Is defined in the FAR, in part, as providing information sufficient for law enforcement to identify the nature and extent of the offense and the individuals responsible Also, timely and complete response to Government auditors and investigators request... Expressly provides that full cooperation does not require waiver of Attorney/client or attorney work product privileges by company or individuals Fifth Amendment rights by individuals 22
HOLDER MEMO JANUARY 2012 Coordination of parallel, criminal, civil, regulatory and administrative proceedings States DOJ policy is that criminal prosecutors and civil trial counsel should timely communicate, coordinate, and cooperate with one another and agency attorneys to the fullest extent appropriate to the case and permissible by law, whenever an alleged offense or violation of federal law gives rise to the potential for criminal, civil, regulatory, and/or agency administrative parallel (simultaneous or successive) proceedings. 23
YATES MEMO SEPTEMBER 2015 Internal DOJ memo related to individual accountability for corporate wrongdoing Six key directives Cooperation credit dependent on corporations providing all relevant facts relating to individuals Investigators to focus on individuals from the inception Coordination between criminal and civil investigators Individuals should not be released from liability when resolving corporate liability Corporations should not be released from liability without a plan for resolving individual cases Civil attorneys should consider more than an individual s ability to pay in evaluating whether to bring suit 24
CRIMINAL DIVISION, EVALUATION GUIDELINES FEB. 2017 Filip Factors 10 factors prosecutors should consider 11 separate compliance areas: 1. Analysis and Remediation of Underlying Conduct 2. Senior and Middle Management 3. Autonomy and Resources 4. Policies and Procedures 5. Risk Assessment 6. Training and Communications 7. Confidential Reporting and Investigation 8. Incentives and Disciplinary Measures 9. Continuous Improvement, Periodic Testing and Review 10. Third Party Management 11. Mergers & Acquisitions 25
TYPES OF ISSUES (APR. 1, 2016- SEP. 30, 2016) Department of Defense 135 Disclosures Labor mischarging (96) Other (14) False certification (7) Anti-Kickback Act (3) Nonconforming parts (3) Conflict of interest (3) False claims (3) Bid rigging (2) Counterfeit parts (2) Procurement integrity (2) General Services Administration 18 Disclosures Unauthorized charges Defective pricing Price reduction monitoring Trade Agreements Act Subcontracting plan monitoring 26
THANK YOU! JEFFERY B. VADEN Partner, Houston, Texas T: +1.713.221.1501 E: jeff.vaden@bracewell.com ROBERT J. WAGMAN, JR. Partner, Washington, DC T: +1.202.828.5872 E: bob.wagman@bracewell.com T E X A S N E W Y O R K W A S H I N G T O N, D C C O N N E C T I C U T S E A T T L E D U B A I L O N D O N 27 b r a c e w e l l. c o m
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