United States: Government Contracts – Current Compliance Issues

This section highlights two major issues related to compliance under federal government contracts from the past year. The first is current compliance issues involving corporate compliance programs and organizational conflicts of interest. The second includes legislative and regulatory issues on the horizon. We also will highlight a few examples of national interest from the courts concerning ethical lapses. (The major topic of the American Recovery and Reinvestment Act of 2009, known as "ARRA" or the "Stimulus Package," is handled separately in Ryan Manger's section.).

I. Current Issues

A. Contractor Business Ethics Compliance and Disclosure

As we noted last year, the major development in ethics and compliance programs became effective on December 12, 2008, called the "Contractor Business Ethics Compliance Program and Disclosure Requirements," (the "FAR Ethics and Compliance Rule" or "Rule"), and with approximately one year of implementation, it remains the major development. Prior to last year, corporate compliance programs for government contractors were largely voluntary, although contractors were largely motivated to have programs due to their relationship with the government as well as incentives offered by the Federal Sentencing Guidelines, which allowed for reduced culpability for convicted contractors that had compliance programs.

Now, FAR 3.1004 requires the incorporation of FAR 52.203-13 mandating the compliance programs in contracts with a value expected to exceed $5,000,000 and having a performance period of 120 days or more. This requirement includes contracts for commercial items and contracts to be performed entirely outside of the United States. Under the FAR Ethics and Compliance Rule, contractors are required to have a written code of business conduct and ethics in place and disseminated to each employee working on a subject contract within 30 days of the award of the contract. This deadline may also be extended by the contracting officer. The Rule basically requires the rooting out and reporting of violations of federal criminal and civil fraud laws, notably those laws controlling conflict of interest, bribery, gratuities and fraud, as well as potential violations of the Civil False Claims Act, 31 U.S.C. Sections 3729-3733. Significantly, this Rule also makes prime contractors responsible for the acts and omissions of their subcontractors and requires the prime to report potential misconduct committed by subs as though the subs were employees of the primes.

Additional requirements are imposed under FAR 52.203-13(c) on contractors who are not qualified small business concerns or producing material defined under FAR 2.101 as commercial items. This section requires the implementation of ongoing business ethics awareness programs within 90 days of contract award, again subject to extension by the contracting officer. Under this section, programs must be developed, disseminated and publicized within the contractor's and subcontractor's organizations, and must include initial and periodic training as well. Moreover, the section requires the adoption and implementation of internal control systems managed from a sufficiently high level within the organization employing adequate resources. The program must provide ways to exclude individuals or subcontractors who have breached the Rule, reporting mechanisms such as hotlines that preserve anonymity, disclosure of and discipline for violations, and "[f]ull cooperation with any Government agencies responsible for audits, investigations, or corrective actions." FAR 52.203-13(c)(2).

The following chart illustrates the various applications of the Rule:

Applicability of Requirements for Code of Business Ethics and Conduct, Business Ethics Awareness and Compliance Program and Internal Control System


Code of Business Ethics and Conduct

Business Ethics Awareness and Compliance Program

Internal Control System

Contractors with Commercial Item Contracts

Yes, with contracts containing FAR 52.203- 13

Not required

Not required

Contractors with Noncommercial Item Contracts

Yes, with contracts containing FAR 52.203- 13

Yes, with contracts containing FAR 52.203- 13

Yes, with contracts containing FAR 52.203-13

Small Business Contractors

Yes, with contracts containing FAR 52.203- 13

Not required

Not required

Contracts Being Performed Wholly Overseas

Yes, with contracts containing FAR 52.203- 13

Yes, with contracts containing FAR 52.203- 13

Yes, with contracts containing FAR 52.203-13


Yes, with sub-contracts containing FAR 52.203- 13

Yes, with sub-contracts containing FAR 52.203- 13

Yes, with subcontracts containing FAR 52.203-13

This chart and its contents were drawn from: Joseph D. West, Diana Richard, Karen L. Manos, Christyne K. Brennan, Joseph A. Barsalona, Philip Koss, and Richard J. Meene, Briefing Paper – Contractor Business Ethics Compliance Program and Disclosure Requirements (Apr. 6, 2009).

B. Organizational Conflicts of Interest

On April 22, 2010, the Department of Defense responded to a Congressional mandate in the Weapons System Acquisition Reform Act and issued a proposed rule providing further guidance to contracting officers and contractors concerning Organizational Conflicts of Interest ("OCIs"). In general, the new rule follows precedent established by the GAO and the Court of Federal Claims in bid protest decisions, formalizing existing case law. The rule establishes mitigation as the preferred resolution for OCIs and provides further guidance for the avoidance of OCIs, such as limitations on future contracting, firewalls and, in some circumstances, exclusion of certain contractors. Waivers, provided they are announced in an RFP, would still be allowed under FAR 9.5.

II. Future Issues

The Lieutenant Colonel Dominic "Rocky" Baragona Justice for American Heroes Harmed by Contractors Act, S. 2782

This bill, proposed by Missouri Sen. Claire McCaskill, would require U.S. government contractors operating abroad to consent to the jurisdiction of domestic courts in the United States to provide redress for injuries inflicted abroad upon members of the Armed Forces, civilian USG employees and privately employed U.S. citizens. It would cover prime as well as subcontractors and would require those contractors not having an office in the United States to designate an agent within the United States to accept service of process. In addition to the remedies available in court, the bill would provide for suspension and debarment for failing to appear in court or evading service of process.

A. United States Sentencing Guidelines

In support of the FAR Ethics and Compliance Rule noted above, the U.S. Sentencing Guidelines are being brought into conformity with FAR Rules to provide clearer guidance and potential benefits to contractors and subcontractors charged with criminal misconduct.

B. Ethical Lapses: Last Year's Lessons Learned

South Carolina's Deputy Assistant Attorney General and former state legislator, Roland Corning, was found parked in a secluded section of a Columbia cemetery over the lunch hour in the company of an 18-year-old representative of the Platinum Plus Gentlemen's Club. When questioned, Corning, 66, attempted to talk his way out of the jam by identifying himself as the State's Deputy Assistant Attorney General. The officer then searched Corning's SUV and found, in addition to the stripper, several sex toys and Viagra. Deputy Assistant Attorney General Corning then kept talking, explaining that he kept "the supplies" on hand "just in case." Apparently the police officer's wife worked with Corning in the Attorney General's Office. Corning was terminated later that same day.

In an elaborate two-step process involving bribes, extortion and fraud, Luzerne County, Pennsylvania, Judge Mark Ciavarella collected over $2,600,000 in kickbacks from the owners of privately-run juvenile detention facilities. Judge Ciavarella first ordered that the local state-run detention center be closed, citing poor conditions. He then began sending and transferring juveniles under state supervision to the private facility, collecting his "commissions" along the way. He was convicted in February of 2009. He and the State of Pennsylvania are also facing a class action suit charging that he aggressively and improperly committed juveniles to the private detention facility.

In a case that hits closer to home for government contractors, Surdex Corporation vice president Russell Hoffman was convicted of violating the federal gratuities statute for giving Titleist golf clubs to his contracting contact at the U.S. Army Corps of Engineers. Surdex provided aerial photography to the Corps, and Hoffman was the project manager. The evidence was undisputed that Hoffman and his Corps contact, William Schwening, had been friends for years and shared golf and many other social activities. The evidence also showed that, over many years' worth of emails, Schwening once told Hoffman that the clubs were "awesome" and added "Hey buddy, do you need ANYTHING[?]. Nothing was returned or exchanged at that time, although Hoffman later reminded Schwening that heneeded to complete a performance rating for Surdex Corporation, which was never completed. On this evidence, and little more, the government built a circumstantial case and a jury convicted Hoffman of providing illegal gratuities for giving a gift "for or because of an official act." The Court of Appeals upheld the conviction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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