Under recent amendments to the Federal Acquisition Regulations (FAR), all contractors who provide goods or services to the federal government under contracts that exceed designated thresholds must “exercise due diligence to prevent and detect criminal conduct” and to “promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.”
Contracting Thresholds
The new amendments apply to all contractors (and subcontractors) if the value of the contract is expected to exceed $5 million and the performance period is 120 days or more.
Written Code of Business Ethics and Conduct
Within 30 days of award of a designated contract, the contractor must have a written code of business ethics and conduct and must make it available to each employee engaged in performance of the contract.
FAR does not delineate the content to be included in the written code of ethics. Instead, it broadly defines unethical conduct as a “violation of federal criminal law involving fraud, conflict of interest, bribery, gratuity violations found in Title 18 of the United States Code and a violation of the civil False Claims Act.”
Ethics Awareness and Compliance Program
Within 90 days after contract award, the contractor must establish an ongoing ethics awareness and compliance program. FAR provides sound practical guidelines for implementing an effective program. Small businesses are exempt from this requirement and from establishing an internal monitoring system.
Training Tailored to Job Responsibilities
FAR requires the contractor to communicate the standards and procedures for ethics awareness, compliance and internal controls to employees. The information disseminated should be “appropriate to an individual’s respective roles and responsibilities.”
Internal Monitoring and Control System
Within 90 days of contract award, the contractor must implement an internal control system to ensure timely discovery of violations and to implement corrective measures.
An internal control system must include:
- Assignment of responsibility at the top. FAR calls for the assignment of responsibility at a “sufficiently high level.” Also, “adequate resources” must be dedicated to ensure the effectiveness of the program.
- Period reviews. FAR calls for periodic review of the company’s ethics policies and programs to ensure compliance with the law and to implement changes, if necessary, to reduce the risk violations.
- Internal reporting system. FAR requires the contractor to implement an internal reporting system, such as a hotline, which allows for anonymity or confidentiality so employees may report suspected instances of improper conduct.
- Display of hotline poster. The contractor must display the agency fraud hotline poster, unless it has implemented a business ethics and conduct awareness program, including a reporting mechanism, such as a hotline poster.
- Disciplinary action. The contractor must take disciplinary action for improper conduct or for failing to take reasonable steps to prevent or detect improper conduct.
- Mandatory disclosure. The contractor or any subcontractor that has “credible evidence” that a principal, employee, agent or subcontractor has committed an ethical violation in connection with the award, performance or closeout of the contract or any subcontract, must “timely disclose” the violation in writing to the Office of the Inspector General and send a copy to the contracting officer. “Credible evidence” means “something higher than reasonable grounds to believe.” A “timely disclosure” implies that the contractor will have time for preliminary examination of the evidence to determine its credibility.
Suspension and Debarment
A contractor may be suspended or debarred for a “knowing failure” by a “principal” to timely disclose “credible evidence” of an ethical violation, as defined above, or a significant overpayment regarding any government contract.
A “principal” includes an owner, partner officer or director or person with primary management or supervisory responsibility (e.g., general manager, plant manager, head of a subsidiary, division, or business segment and similar persons).
A “knowing failure” means actual knowledge of “credible evidence” of a violation.
Retroactive Three-Year Disclosure Period
The disclosure requirement continues until at least three years after final payment on the contract and is retroactive. It applies to all government contracts where final payment was received since Dec. 12, 2005.
The long-term reward of the FAR amendments in curbing contractor fraud is yet to be realized. Due to the potential sanctions of suspension or debarment, contractors must make compliance a priority.