United States: Mandatory Disclosure Rules

In recent years, the federal government has promulgated several procurement rules under the Federal Acquisition Regulation ("FAR") (FAR §§ 3.1003(a), 9.406, 9.407) imposing on contractors the duty to report credible evidence of a violation of federal criminal law involving fraud, conflict of interest, bribery or gratuity, or violation of the Civil False Claims Act. These same rules require disclosure of credible evidence of a significant overpayment (other than overpayments resulting from contract financing payments) (collectively, the "Mandatory Disclosure Rules").

These rules provide procurement agencies with a most potent weapon – the ability to suspend or debar contractors for failure to timely disclose credible evidence of such violations. Although the penalty for not reporting credible evidence of a violation is onerous, the Mandatory Disclosure Rules are widely misunderstood by contractor and agency personnel alike.

A first point of confusion stems from the fact that the rules contemplate submission of an administrative disclosure to the agency Office of Inspector General ("OIG"), with a copy to the cognizant contracting officer; yet the disclosure submittal instructions provided by many agencies only mention submitting the form to OIG. Moreover, for agencies that permit the submission of electronic forms, it is ambiguous whether the forms are automatically transmitted to the contracting officer, leaving contractors to wonder whether they have satisfied their full disclosure obligation when submitting the form directly through the agency's website. Second, the contractor is not being called upon to determine whether a violation of federal laws has actually occurred; instead, the contractor is required to disclose the existence of "credible evidence" of such a violation. But the credibility of evidence will naturally depend on many factors and will vary from situation to situation. Not all evidence is credible, and therefore disclosure will not be required in every instance. The contractor is called upon to make a judgment about the credibility of evidence in its possession, and to make such a judgment, the contractor must first expend some independent due diligence to assess whether it actually possesses credible evidence of a violation of a federal law of the sort that triggers a duty to report under the referenced procurement rules and implementing clauses. To conduct even a rudimentary inquiry regarding the credibility of evidence in the possession of its employees, the contractor must have some sort of internal reporting mechanism to make sure that senior decision-makers are aware of the alleged improper conduct so that they can initiate due diligence, contact counsel, conduct interviews, review email traffic, etc. Similarly, contractor financial controls should be rigorous enough to detect significant overpayments received from the government agencies (and government prime contractors), and once detected, such overpayments must be analyzed to determine whether the overpayment was the result of contract financing or some other form of payment.

It is terribly important, therefore, that the contractor establishes and maintains a robust internal reporting mechanism and financial controls, and that it conducts adequate training of its employees so that they know what should be reported up the chain of command. Contractors must also be sensitive to the fact that the administrative enforcement period (for a knowing failure to disclose) lasts for the life of the contract, plus three years after final payment.

A recent example illustrates the value of a robust internal reporting mechanism. In April 2015, the U.S. Department of Justice ("DOJ") announced that seven people had been charged in a scheme to pay financially significant kickbacks to a procurement official who was employed by a subsidiary of the Boeing Company (that subsidiary manufactures and sells satellites, satellite parts, and services). Boeing's established processes for detecting and reporting perceived fraudulent activity enabled the company to fully comply with the FAR's Mandatory Disclosure Rules. As a consequence of that disclosure, Boeing was not itself the subject or target of DOJ's investigation.

In taking a more granular look at the disclosure rules, we look first at the requirements embodied in FAR § 52.203- 13. This clause is required if the value of the contract is expected to exceed $5 million and the performance period is 120 days or more. The requirements of this clause must be flowed down to all subcontracts that meet the same performance thresholds. This same clause provides contractors with a reasonably detailed road map for the steps that contactors are required to take, such as (1) implementation of a business ethics and compliance program which includes (a) dissemination of relevant information to employees and (b) training which takes into account each employee's duties and responsibilities; and (2) institution of an internal control system which includes (a) detection measures for identifying improper conduct and (b) mechanisms for developing corrective action. The control system is to be under the cognizance of a senior company official who will have at his or her disposal adequate resources to ensure the effectiveness of the program and its constituent controls. The program should also include effective procedures for (i) identifying individuals whose prior conduct would warrant their not being designated as a principal of the contractor; (ii) conducting periodic reviews and audits to validate the effectiveness of controls and procedures; (iii) continued reassessment to reduce the risk of criminal conduct; (iv) establishing internal reporting mechanisms, such as a third-party confidential hotline, for employee reporting; (v) assessing meaningful disciplinary action; and (vi) preparing and timely submitting any disclosures required under the Mandatory Disclosure Rules. Going full circle, the provisions at FAR § 9.407-2 and FAR § 9.406-2 establish the circumstances under which the government's suspension and debarment officials ("SDO") may suspend or debar contractors for the many improprieties enumerated thereunder. These provisions grant the SDO express authority to suspend or debar a contractor that knowingly fails to comply with the Mandatory Disclosure Rules.

Owing in part to the mandatory nature of the disclosure rules, and in part to contractors naturally having to compete for most of the contracts the government awards, there is the temptation to use the disclosure process as a means for distracting or even knocking out a competitor by reporting rumor, innuendo, or facially serious allegations not rooted in credible evidence. While there are no formal mechanisms within the Mandatory Disclosure Rules to deter or prevent this behavior, at a minimum, companies should be wary of federal criminal laws punishing false statements before attempting to use mandatory disclosures offensively.

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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