A Comprehensive and Easy-to-Use Guide to the Federal Procurement Ethics Requirements! Revised to include recent changes in procurement ethics rules, such as the significant additions to the False Claims Act made by Congress in 2009, this book is a complete, all-in-one resource. This plain-English guide focuses on exactly what procurement professionals—both federal officials and contractor employees—need to know to be in compliance with the law and to conduct better business practices. Federal Procurement Ethics: The Complete Legal Guide, Revised Edition, provides comprehensive, easy-to-understand descriptions of all the ethics rules that procurement professionals in both government and the private sector need to follow. Summaries of recent and relevant court cases that illustrate the need for full compliance with procurement regulations are also included.
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About the Author
Terrence M. O’Connor, LLM, has practiced government contract law for over 35 years. After 15 years as an attorney for the federal government, he entered private practice, focusing on litigation and teaching. He has tried more than 70 criminal jury cases and more than 30 civil/non-jury administrative hearings, including government contract claims before the U.S. Court of Federal Claims and various Boards of Contract Appeals. He is the co-author of the Federal Contracting Answer Book and the author of Understanding Government Contract Law. He also writes monthly columns on recent court, GAO, and BCA decisions in the Management Concepts monthly newsletter, Federal Acquisition Report.
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Federal Procurement Ethics
The Complete Legal Guide
By Terrence M. O'Connor
Management Concepts PressCopyright © 2010 Management Concepts, Inc.
All rights reserved.
The Components of a Contractor's Ethics Program
The new ethics rules added to the Federal Acquisition Regulation (FAR) in late 2007 (see Appendix A) cover three components of a contractor's ethics program:
* A written code of business ethics
* An internal control system to help contractors and their employees comply with the code
* An ethics training program (also referred to as an ethics awareness program).
The changes made in late 2008 (see Appendix B) converted the "suggested" components of an internal control system to "required" components, described in more detail what a company's ethics training program should involve, and imposed a self-disclosure requirement on contractors.
A contractor can take two different approaches to implementing these rules:
1. Do only what the FAR requires — do the "shall" but not the "should"
2. Go beyond the "shall" and do the "should"
This chapter describes the self-disclosure requirements FAR imposes on all contractors as well as the three components of a contractor's ethics program that apply to some but not all contractors. In doing so, we take the aggressive approach and assume that any contractor would want the benefits of being seen as "a good contractor" (see Preface, p. xiv) in the eyes of a contracting officer and therefore would want to adopt not only those ethics provisions required of the contractor but also those that FAR encourages a contractor to voluntarily adopt, the "shoulds." Chapter 2 focuses on the applicability of the components of an ethics program to different types and sizes of contracts.
The basic rule regarding self-disclosure is this: Generally stated, all contractors and subcontractors face debarment or suspension for failure to disclose illegal contract activities they know about. This general rule has a number of details that have to be mastered but, contrary to the cliché, the devil is not in the details here. The details, according to the FAR Council, are designed to make compliance easier on contractors. Many of these important details are described only in the 30,000 words of the Federal Register publication of the rules, therefore we have included the commentary that accompanies the FAR rules in Appendixes A and B.
A contractor looking only at the new FAR language will miss many of the important fine points of the FAR provisions. The FAR is only the "letter of the law." Additional guidance and explanations of the new regulations — the spirit of the law — can be found in the "Responses" accompanying the new regulations in the Federal Register. These responses, prepared by the FAR Council, address comments made by the public on the proposed regulations. They contain important information that is missing from the new rules themselves.
So in describing these new rules, you will see references to the Federal Register pages featuring the "Responses" for December 2007 rules, which start at 72 FR 65873 (published November 23, 2007), and the December 2008 rules, which start at 73 FR 67064 (published November 12, 2008).
The starting point of the self-disclosure rules is the text of the FAR clause, FAR 3.1003(a)(2):
[A] contractor may be suspended and/or debarred for 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 subcontract awarded thereunder, credible evidence of 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 a violation of the civil False Claims Act. Knowing failure to timely disclose credible evidence of any of the above violations remains a cause for suspension and/or debarment until 3 years after final payment on a contract (see 9.406-2(b)(1)(vi) and 9.407-2(a)(8)).
To some extent, this clause makes government contractors and subcontractors responsible for blowing the whistle on illegal conduct in their own contracts — or risk being debarred or suspended if they don't. But the following five details are critical.
1. The self-disclosure rule applies only to a "principal" in a company. It is not the employees of a company that must report possible wrongdoing. It is only a company "principal," defined by FAR 2.101 as: "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)." The effect of this "principal principle" is that a company cannot be debarred if an employee knows of illegal conduct on a company contract but fails to report it to top management.
2. The self-disclosure duty applies only if the company principal "knows" about the illegal conduct — not what the principal "should have known." This "knowing" requirement protects the principal: "[r]equiring a 'knowledge' element to the cause of action actually provides more protection for contractors. The Councils do not agree with adding 'or should have known.' The principals are only required to disclose what they know." 73 FR 67069.
3. A principal only has to disclose illegal conduct he or she knows about if there is "credible evidence" of illegal activity. The FAR does not define this critical term, but the FAR Council does give some guidance on what it means in discussing why it changed the operative phrase from "reasonable grounds to believe" to "credible evidence" at the request of the Justice Department:
[Credible evidence] indicates a higher standard, implying that the contractor will have the opportunity to take some time for preliminary examination of the evidence to determine its credibility before [disclosing it] to the Government. ... In addition, adding to the standard of "credible evidence" the requirement to make a "timely" report 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. ... This does not impose upon the contractor 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. 73 FR 67073.
4. A company "principal" does not have to be an expert on the entire U.S. criminal code. The self-disclosure duty applies only to known violations of four federal criminal laws or the civil False Claims Act. The disclosure duty applies to federal criminal laws on fraud, conflicts of interest, bribery and gratuities, but not antitrust violations like bid rigging.
It's important to make special mention of the conflict of interest laws. Conflicts of interest are prohibited by federal laws, and by federal and agency regulations. The only conflicts of interest subject to the self-disclosure duty are those covered by title 18 of the U.S. Code, the federal criminal code. The FAR Procurement Integrity provisions at 3.104-2(b) are helpful:
Government officers and employees (employees) are prohibited by 18 U.S.C. 208 and 5 CFR Part 2635 from participating personally and substantially in any particular matter that would affect the financial interests of any person with whom the employee is seeking employment. An employee who engages in negotiations or is otherwise seeking employment with an offeror or who has an arrangement concerning future employment with an offeror must comply with the applicable disqualification requirements of 5 CFR 2635.604 and 2635.606. The statutory prohibition in 18 U.S.C. 208 also may require an employee's disqualification from participation in the acquisition even if the employee's duties may not be considered 'participating personally and substantially,' as this term is defined in 3.104-1. ... Post-employment restrictions are covered by 18 U.S.C. 207 and 5 CFR parts 2637 and 2641, that prohibit certain activities by former Government employees, including representation of a contractor before the Government in relation to any contract or other particular matter involving specific parties on which the former employee participated personally and substantially while employed by the Government. Additional restrictions apply to certain senior Government employees and for particular matters under an employee's official responsibility[.]
5. The self-disclosure duty has, in a sense, a statute of limitations. It starts from the beginning of the solicitation process and lasts until three years after contract closeout. The FAR Councils initially considered using contract closeout as the end point for the requirement to disclose fraud, but:
[A]ccording to the Justice Department, contract fraud often occurs at the time of closeout, and cutting off the obligation to disclose at that point would exempt many of these violations from the obligation to disclose. Three years after final payment is consistent with most of the contractor record retention requirements (see Audit and Records clauses at FAR 52.214-26 and 52.215-2). Therefore, the Councils concur with Justice's recommendation that the mandatory disclosure of violations should be limited to a period of three years after contract completion, using final payment as the event to mark contract completion. 73 FR 67073.
It's important to remember that this duty of self-disclosure that every contractor has is also a required part of a code of business ethics and conduct that only some contractors must have. For example, although a small business does not have to have an internal control system designed to encourage self-disclosure, the small business still has the same self-disclosure duty imposed on all government contractors. Later in this chapter, we will focus more specifically on the FAR requirements for business ethics awareness and the compliance program and internal control system that, as mentioned above, are required only of some contractors but not required of a small business nor all contracts for the acquisition of a commercial item. Before doing so, we will discuss a requirement that, like the duty of self-disclosure, all contractors have: the requirement of adopting a Code of Business Ethics.
A CODE OF BUSINESS ETHICS
Developing and adopting a code of business ethics is generally not burdensome for a contractor. Codes can be drafted using numerous models found on the Internet (see Appendix C for an example). The code of business ethics developed by the U.S. Department of Transportation Suspension and Debarment Work Group offers this definition:
A Code of Business Ethics is an open disclosure of the way an organization operates and provides visible guidelines for behavior. It serves as an important communication vehicle to the company's employees, customers, subcontractors, and the community at large that the organization is committed to the highest ethical standards of conduct in its operations.
Additionally, a Code of Business Ethics is intended to promote ethical and law-abiding conduct within an organization and clearly communicate to employees what is expected of them and the consequences for violations.
The following are a few of the elements an effective Code of Business Ethics should have:
* Commitment by the organization's directors and top management to abiding by the Code and also ensuring that all employees are aware of and abide by the Code
* Applicability to all levels of the organization
* A letter from the President or Chief Executive of the organization communicating what the Code is and the organization's commitment to following the Code
* A table of contents so that employees will be able to easily find the organization's policy for a specific issue
* A statement of policy concerning the Code and the general rules that apply to the Code
* Standards of Conduct that communicate what issues employees should be aware of and what to do whenever confronted with any such issue
* A statement requiring employees to report suspected violations and to cooperate with the implementation of the code.
Since these templates are available for contractors to use, drafting a code of business ethics should not be difficult. To summarize, all contractors "should" have a code of business ethics. As we will see in Chapter 2, only some contractors must have a code of business ethics.
Required Components of a Business Ethics Awareness and Compliance Program and an Internal Control System
The 2007 FAR requirements in Appendix A for codes of business ethics, training, and internal controls, were a good start for ethics reform, but unfortunately contained a huge landmine: They left contractors thinking that 100 percent compliance provided complete protection if their company somehow got involved in criminal activity. According to the FAR Councils, faithfully following the 2007 FAR requirements created "a false sense of security" in contractors.
Businesses (especially small businesses) may believe they have met all the compliance requirements of the U.S. Government by following the FAR; this will create a false sense of security. 72 FR 64020.
To the FAR Councils, this false sense of security arose from the fact that the 2007 FAR changes failed to alert contractors to the U.S. Sentencing Commission's guidelines used in sentencing contractors convicted of a felony or Class A misdemeanor, whether or not the crime arose from a procurement situation.
The U.S. Sentencing Guidelines provide guidance on what the U.S. Sentencing Commission expects in the way of an effective compliance and ethics program from organizations convicted of a felony or Class A misdemeanor. The Department of Justice and other respondents to the FAR Case 2006–007 proposed rule [now adopted] considered that that proposed rule left out important elements that are covered in the U.S. Sentencing Guidelines and that this can create confusion. 72 FR 94019-20.
This defect in the 2007 ethics rules was corrected by the 2008 FAR rules in Appendix B. Now, the FAR's description of an internal control system satisfies the U.S. Sentencing Commission's guidelines. In addition, while the 2007 FAR changes provided only vague guidelines for developing an ethics awareness and compliance program and an internal control system, the 2008 FAR changes give a much more detailed and helpful description of them.
Required Components of a Business Ethics Awareness and Compliance Program
The FAR now describes this program in 52.203-13(c)(1):
(i) This program shall include reasonable steps to communicate periodically and in a practical manner the Contractor's standards and procedures and other aspects of the Contractor's business ethics awareness and compliance program and internal control system, by conducting effective training programs and otherwise disseminating information appropriate to an individual's respective roles and responsibilities.
(ii) The training conducted under this program shall be provided to the Contractor's principals and employees, and as appropriate, the Contractor's agents and subcontractors.
We will look at each of these in turn.
Required Components of an Internal Control System
FAR 52.203-13 (c)(2)(i), adopted as part of the 2008 ethics changes, provides an outline of the internal control system:
(i) The Contractor's internal control system shall —
(A) Establish standards and procedures to facilitate timely discovery of improper conduct in connection with Government contracts; and
(B) Ensure corrective measures are promptly instituted and carried out.
Excerpted from Federal Procurement Ethics by Terrence M. O'Connor. Copyright © 2010 Management Concepts, Inc.. Excerpted by permission of Management Concepts Press.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Table of Contents
ContentsAuthor's Note on the Revised Edition,
PART I: THE NEW ETHICS REQUIREMENTS,
CHAPTER 1: The Components of a Contractor's Ethics Program,
CHAPTER 2: Applicability of the New Ethics Regulations,
PART II: The FAR Rules,
CHAPTER 3: Ethics Rules for Getting a Contract,
CHAPTER 4: Ethics Rules for Administering Contracts,
PART III: FEDERAL STATUTES AND RULES AFFECTING PROCUREMENT,
CHAPTER 5: Federal Employee Conduct,
Chapter 6: Federal Laws about Contractor Conduct,
PART IV: PREVENTING AND UNCOVERING FRAUD,
CHAPTER 7: Fighting Fraud: Common Fraudulent Activities,
APPENDIX A: Final Rules: Federal Acquisition Regulation and FAR Case 2006-007, Contractor Code of Business Ethics and Conduct,
APPENDIX B: Proposed Rules: Federal Acquisition Regulation and FAR Case 2006-007, Contractor Compliance Program and Integrity Reporting,
APPENDIX C: Code of Ethics Guide,
APPENDIX D: Advisory Opinion of the Office of Government Ethics,
APPENDIX E: Office of Government Ethics, Ethics and Working with Contractors,