United States: Suspension, Debarment, Procurement Fraud, And Government Contractor Transactions

Exclusions from government contracting by suspensions and debarments, as well as by procurement fraud investigations and enforcement actions, can scuttle pending corporate transactions. This BRIEFING PAPER discusses the interactions between (a) government contractors and their purchasers on the one hand, and (b) government Suspending and Debarring Officials (SDOs,) SDO staffs, and the government's procurement fraud remedies apparatus on the other, in the context of corporate transactions.

Understanding the interests of the various public and private stakeholders is important to breaking down barriers to effective communication and increasing the chances of closing transactions.

Common aspects of diligence in the context of government contracts transactions include understanding which risks may impact a contractor's ability to compete for, and win, new government contracts and what potential liability may exist for past misconduct. Quantifying those risks can be challenging given the opacity of much of the government's procurement fraud and suspension/debarment operations. This PAPER will identify the more common categories of interaction as they relate to government contractor corporate transactions and provide guidelines for facilitating efficient interactions with SDOs, their staffs, and the government's procurement fraud apparatus.

About Suspension And Debarment

Suspensions and debarments are temporary exclusions from new government contracts, generally lasting up to three years.¹ Causes for exclusion can include, but are not limited to, commission of certain civil and criminal frauds and overcharging the government.² There is also a broad catch-all provision that permits exclusions in the discretion of the suspending and debarring official based on "any other cause of so serious or compelling a nature that it affects the present responsibility of the contractor or subcontractor."³ This catch-all provision is the most challenging for parties to a pending transaction to deal with.

About The Government's Procurement Fraud Remedies Apparatus

Suspension and debarment is just one element of the government's varied and occasionally disjointed procurement fraud apparatus. The list of stakeholders is long and made up of myriad different stakeholders such as auditors, contracting officials, lawyers, investigating agents, suspension and debarment officials, and the Department of Justice (DOJ). Some agencies, especially the Military Departments, have additional officials who coordinate disparate functions and stakeholders.⁴ Any one of these stakeholders can create risks for pending transactions.

The remainder of this PAPER will address common categories of communication between companies undergoing corporate transactions and the government's procurement fraud apparatus and provide tips and tricks for more effective and efficient interactions.

Compliance Issues Uncovered During Diligence

Pre-transaction diligence frequently uncovers government contracting compliance issues. While the full range of these issues varies widely, more common issues can include accuracy of business size representations, contract noncompliance, quality deficiencies, and cost and pricing irregularities. Each of these issues has the potential to result in procurement fraud enforcement action (including False Claims Act⁵ actions) as well as exclusion through suspension and debarment. Regardless of their type, common steps exist to address compliance issues uncovered during diligence.

Assuming the compliance issue is material to the pending deal, the parties will likely want to investigate the source, duration, and the potential contract noncompliance. At a minimum, the buyer and the seller will both want to know how big the issue is, how many contracts are affected, and what contract terms, regulations, and laws might be impacted. This will permit the parties to conduct separate analysis of the potential financial and reputational impacts of the noncompliance and to adjust their strategies accordingly.

Potential purchasers frequently require contractors to disclose noncompliance to the government customer prior to closing. By placing the noncompliance on the government's radar, the purchaser may obtain a sense of how serious the issue is in the eyes of enforcement officials. The government's response may impact deal strategy. Additionally, purchasers may also require sellers to obtain comfort that the issue is over and will not present additional risks before a transaction closes.

Multiple options exist for communicating government contract noncompliance to the customer. The most common is through the Mandatory Disclosure Rule. The Mandatory Disclosure Rule requires timely disclosure of credible evidence of, among other things, civil False Claims Act violations, certain violations of criminal law, and significant overpayments to the cognizant contracting officer as well as to the relevant Office of Inspector General.⁶ Other avenues include conversations or emails with the purchasing customer, and/or with the contracting officer.

Regardless of how contractors choose to communicate noncompliance with the government, both the contracting community and the procurement fraud community will have interest in the communication. These communities work at different paces and have different incentives and goals.

The contracting community's primary focus is on procuring the right goods or services, at the right prices, delivered at the right times. Accordingly, presenting the issues with as little an impact on cost, schedule, and quality as possible increases the chance of contracting community non-objection. If the issue does impact cost, schedule, and/or quality, then a fulsome mitigation plan with aggressive communication regarding the commitment to address any and all impacts of the issue is likely to speed resolution.

The procurement fraud community's goals are different. The goals include coordinating the appropriate mix of all applicable remedies from criminal prosecution to civil fraud recovery to contractual remedies to potential exclusion from contracting through suspension or debarment. None of these remedies are automatic, however. Discretion plays an important role here, too. While the procurement fraud community is focused on returning losses to the government and penalizing misconduct, the community will exercise discretion in the contractor's favor in certain circumstances.

For example, rapid and complete remediation can impress the government's procurement fraud community. There is no specific measure of remediation that contractors can use to know when they have hit the mark. However, the remedial measures and mitigating factors listed at Federal Acquisition Regulation (FAR) 9.406- 1(a) are helpful guideposts:

1. Whether the contractor had effective standards of conduct and internal control systems in place at the time of the activity which constitutes cause for debarment or had adopted such procedures prior to any Government investigation of the activity cited as a cause for debarment.
2. Whether the contractor brought the activity cited as a cause for debarment to the attention of the appropriate Government agency in a timely manner.
3. Whether the contractor has fully investigated the circumstances surrounding the cause for debarment and, if so, made the result of the investigation available to the debarring official.
4. Whether the contractor cooperated fully with Government agencies during the investigation and any court or administrative action.
5. Whether the contractor has paid or has agreed to pay all criminal, civil, and administrative liability for the improper activity, including any investigative or administrative costs incurred by the Government, and has made or agreed to make full restitution.
6. Whether the contractor has taken appropriate disciplinary action against the individuals responsible for the activity which constitutes cause for debarment.
7. Whether the contractor has implemented or agreed to implement remedial measures, including any identified by the Government.
8. Whether the contractor has instituted or agreed to institute new or revised review and control procedures and ethics training programs.
9. Whether the contractor has had adequate time to eliminate the circumstances within the contractor's organization that led to the cause for debarment.
10. Whether the contractor's management recognizes and understands the seriousness of the misconduct giving rise to the cause for debarment and has implemented programs to prevent recurrence.

Contractors will generally be unable to meet each and every one of the 10 factors listed in FAR 9.406-1(a), but the more they are able to meet, the better the communication will be received by the procurement fraud community. The most relevant of the factors are briefly discussed below:

1. Whether the contractor had effective standards of conduct and internal control systems in place at the time of the activity or had adopted such procedures prior to any Government investigation.⁷ This factor is focused on how well designed the contractor's systems were before the misconduct occurred and therefore focuses the government on whether it is reasonable to seek to punish the misconduct or whether discretion is appropriate for a well-meaning mistake that slipped by otherwise robust controls.
2. Whether the contractor brought the activity to the attention of the appropriate Government agency in a timely manner.⁸ By communicating promptly about an issue discovered during diligence, contractors will satisfy this factor's requirements.
3. Whether the contractor has fully investigated the circumstances and, if so, made the result of the investigation available.⁹ There is some tension between the desire for prompt, though possibly incomplete, disclosure under the Mandatory Disclosure Rule and the "full investigation" discussed in this mitigating factor. Nevertheless, keeping the government apprised of key facts in reasonably prompt fashion should earn credit under this factor.
4. Whether the contractor has paid or has agreed to pay all criminal, civil, and administrative liability for the improper activity, including any investigative or administrative costs incurred by the Government, and has made or agreed to make full restitution.¹⁰ The relevant portion of this remedial measure is whether the contractor has made or agreed to make full restitution. To the extent the misconduct involves easily ascertainable amounts of money that are owed to the government, such as in the time mischarging or price reduction contexts, and if the company is financially able to do so, the contractor should consider paying that amount or seeking instructions from the government to pay that amount to earn credit under this factor.
5. Whether the contractor has taken appropriate disciplinary action against the individuals responsible for the activity.¹¹ It is generally not sufficient to disclose facts only. An understanding of root cause and how remediation addresses the root cause is important. Additionally, and relevant to this factor, if the facts do not warrant disciplinary action, the contractor should be prepared to explain why that is the case.
6. Whether the contractor has implemented or agreed to implement remedial measures and whether the contractor has instituted or agreed to instate new or revised internal control procedures and ethics training programs.¹² Related to the last factor, a key component of any government disclosure is to provide an explanation for why the same problem will not reoccur. That same information is helpful here. The government will want the contractor to make appropriate changes to address the misconduct, so the problem cannot reoccur whether or not the deal closes.

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Footnotes

1. FAR 9.406, 9.407.

2. FAR 9.406-2, 9.407-2.

3. FAR 9.406-2(c), 9.407-2(c).

4. See Department of Defense Instruction 7050.05, "Coordination of Remedies for Fraud and Corruption Related to Procurement Activities" (May 12, 2014; incorporating Change 1, effective July 7, 2020), available at https://www.esd.whs.mil/Portals/54/Documents/DD/issuanc es/dodi/705005p.pdf?ver=2020-07-07-065758-907.

5. 31 U.S.C.A. §§ 3729–3733.

6. FAR 52.203-13.

7. FAR 9.406-1(a)(1).

8. FAR 9.406-1(a)(2).

9. FAR 9.406-1(a)(3).

10. FAR 9.406-1(a)(5).

11. FAR 9.406-1(a)(6).

12. FAR 9.406-1(a)(7), (8).

Originally published by Thomson Reuters

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