[Federal Register: November 12, 2008 (Volume 73, Number 219)]
[Rules and Regulations]
[Page 67064-67093]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr12no08-23]
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DEPARTMENT OF DEFENSE
GENERAL SERVICES ADMINISTRATION
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
48 CFR Parts 2, 3, 9, 42 and 52
[FAC 2005-28; FAR Case 2007-006; Item I; Docket 2007-001; Sequence 11]
RIN 9000-AK80
Federal Acquisition Regulation; FAR Case 2007-006, Contractor
Business Ethics Compliance Program and Disclosure Requirements
AGENCIES: Department of Defense (DoD), General Services Administration
(GSA), and National Aeronautics and Space Administration (NASA).
ACTION: Final rule.
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SUMMARY: The Civilian Agency Acquisition Council and the Defense
Acquisition Regulations Council (Councils) have agreed on a final rule
amending the Federal Acquisition Regulation (FAR) to amplify the
requirements for a contractor code of business ethics and conduct, an
internal control system, and disclosure to the Government of certain
violations of criminal law, violations of the civil False Claims Act,
or significant overpayments. This final rule implements Pub. L. 110-
252, Title VI, Chapter 1.
DATES: Effective Date: December 12, 2008.
Applicability: The Contractor's Internal Control System shall be
established within 90 days after contract award, unless the Contracting
Officer establishes a longer time period (See FAR 52.203-13(c)). The
Internal Control System is not required for small businesses or for
commercial item contracts.
FOR FURTHER INFORMATION CONTACT: Mr. Ernest Woodson, Procurement
Analyst, at (202) 501-3775 for clarification of content. For
information pertaining to status or publication schedules, contact the
FAR Secretariat at (202) 501-4755. Please cite FAC 2005-28, FAR case
2007-006.
SUPPLEMENTARY INFORMATION:
Table of Contents
A. Background
B. Discussion and Analysis
1. Interrelationship of previous final rule, first proposed
rule, second proposed rule, and new statute.
2. Mandatory standards for internal control system.
3. Mandatory disclosure to the OIG.
4. Full Cooperation.
5. Suspension/Debarment.
6. Extend to violation of civil False Claims Act.
7. Application to acquisition of commercial items.
8. Application to contracts to be performed outside the United
States.
9. Other applicability issues.
10. Additional recommendations.
11. Regulatory Flexibility Act concerns.
12. Paperwork Reduction Act (PRA).
13. E.O. 12866.
C. Regulatory Flexibility Act
D. Paperwork Reduction Act
[[Page 67065]]
A. Background
This case is in response to a request to the Office of Federal
Procurement Policy from the Department of Justice, dated May 23, 2007,
and the Close the Contractor Fraud Loophole Act, Public Law 110-252,
Title VI, Chapter 1. This final rule amends the Federal Acquisition
Regulation to require Government contractors to--
Establish and maintain specific internal controls to
detect and prevent improper conduct in connection with the award or
performance of any Government contract or subcontract; and
Timely disclose to the agency Office of the Inspector
General, with a copy to the contracting officer, whenever, in
connection with the award, performance, or closeout of a Government
contract performed by the contractor or a subcontract awarded
thereunder, the contractor has 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 (31 U.S.C. 3729-3733).
The rule also provides as cause for suspension or
debarment, knowing failure by a principal, until 3 years after final
payment on any Government contract awarded to the contractor, to timely
disclose to the Government, in connection with the award, performance,
or closeout of the contract or a subcontract 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;
B. Violation of the civil False Claims Act; or
C. Significant overpayment(s) on the contract, other than
overpayments resulting from contract financing payments as defined in
FAR 32.001, Definitions.
DoD, GSA, and NASA published a proposed rule in the Federal
Register at 72 FR 64019, November 14, 2007, entitled ``Contractor
Compliance Program and Integrity Reporting.'' The public comment period
closed on January 14, 2008. (This was a follow-on case to the final
rule under FAC 2005-22, FAR case 2006-007 that was published in the
Federal Register at 72 FR 65868, November 23, 2007, effective December
24, 2007.) A second proposed rule was published in the Federal Register
at 73 FR 28407, May 16, 2008, entitled ``Contractor Compliance Program
and Integrity Reporting.'' The public comment period on the second
proposed rule closed on July 15, 2008.
On June 30, 2008, the Close the Contractor Fraud Loophole Act (Pub.
L. 110-252, Title VI, Chapter 1) was enacted as part of the
Supplemental Appropriations Act, 2008. This Act requires revision to
the FAR within 180 days of enactment, pursuant to 2007-006, ``or any
follow-on FAR case to include provisions that require timely
notification by Federal contractors of violations of Federal criminal
law or overpayments in connection with the award or performance of
covered contracts or subcontracts, including those performed outside
the United States and those for commercial items.'' The statute also
defines a covered contract to mean ``any contract in an amount greater
than $5,000,000 and more than 120 days in duration.''
First proposed rule. The first proposed rule, published in the
Federal Register on November 14, 2007, proposed the following:
1. New causes for suspension/debarment. A contractor may be
suspended and/or debarred for knowing failure to timely disclose--
An overpayment on a Government contract; or
A violation of Federal criminal law in connection with the
award or performance of any Government contract or subcontract.
2. Changes to the requirement for a code of business ethics and
conduct (52.203-XX).
Amplify the requirement to promote compliance with the
code of business ethics.
Require timely disclosure to the agency Office of the
Inspector General (OIG), with a copy to the contracting officer,
whenever the contractor has reasonable grounds to suspect a violation
of criminal law in connection with the award or performance of the
contract or any subcontract thereunder.
3. Mandatory requirements for internal control system based on U.S.
Sentencing Guidelines (USSG).
Provide more detail with regard to the ongoing business
ethics awareness and compliance program (see 52.203-XX
paragraph(c)(1)).
Make all the stated elements of the internal control
system mandatory, rather than examples (see 52.203-XX (c)(2)(ii)).
A. Add a new paragraph requiring assignment of responsibility
within the organization for the ethics awareness and compliance program
and internal control system.
B. Require reasonable efforts not to include as principals
individuals who have engaged in illegal conduct or conduct otherwise in
conflict with the contractor's code of business ethics and conduct.
C. Provide additional detail with regard to the requirement for
periodic reviews.
D. Require that the internal reporting mechanism or hotline must
allow for anonymity or confidentiality.
E. Provide that disciplinary action will be taken not only for
improper conduct, but also for failing to take reasonable steps to
prevent or detect improper conduct.
F. Require timely disclosure, in writing, to the agency OIG, with a
copy to the contracting officer, whenever the contractor has reasonable
grounds to believe that a violation of Federal criminal law has been
committed in connection with the award or performance of any Government
contract performed by the contractor or the award or performance of a
subcontract thereunder.
G. Require full cooperation with any Government agencies
responsible for audit, investigation, or corrective actions.
Second proposed rule. The second proposed rule, published in the
Federal Register on May 16, 2008, proposed the following:
1. Require inclusion of the clause at FAR 52.203-13 in contracts
and subcontracts that will be performed outside the United States.
2. Require inclusion of the clause at FAR 52.203-13 in contracts
(and subcontracts) for all acquisitions of a commercial item. However,
similar to small businesses, a formal business ethics awareness and
compliance program and internal control system are not required in
contracts and subcontracts for the acquisition of commercial items.
3. Add a new cause for suspension and/or debarment, i.e., knowing
failure to timely disclose the violation of the civil False Claims Act
(civil FCA) in connection with the award or performance of any
Government contract or subcontract.
The first two of these three proposed changes are now required by
statute (Pub. L. 110-252, Title VI, Chapter 1). (As pointed out by one
of the respondents, there was an error in the amendatory language in
the Federal Register. At FAR 3.1004, the introductory text should have
been deleted, rather than showing 5 asterisks, indicating that the
introductory text is still present. However, the preamble made our
intent very clear and this will be clarified in the final rule).
Rule on Contract Debts. DoD, GSA, and NASA published a proposed
rule, FAR case 2005-018, in the Federal
[[Page 67066]]
Register at 71 FR 62230, October 24, 2006, regarding contract debts.
The final rule was published in the Federal Register at 73 FR 53997,
September 17, 2008, as part of Federal Acquisition Circular 2005-27.
The intent of this rule is to evaluate existing controls and procedures
for ensuring that contract debts are identified and recovered in a
timely manner, properly accounted for in each agency's books and
records, and properly coordinated with the appropriate Government
officials.
One of the following payment clauses should be included in each
Government solicitation and contract:
--52.212-4, Contract Terms and Conditions--Commercial Items, basic
clause and Alternate I.
--52.232-25, Prompt Payment.
--52.232-26, Prompt Payment for Fixed-Price Architect-Engineer
Contracts.
--52.232-27, Prompt Payment for Construction Contracts.
These Payment clauses for years have contained the requirement to
immediately notify the contracting officer if the contractor becomes
aware of any overpayment on a contract financing or invoice payment.
Compliance with this requirement fulfills the statutory requirement of
Pub. L. 110-252 for timely notification of overpayments.
In addition, under the Contract Debts rule, these Payment clauses
were modified to require that if the contractor becomes aware of a
duplicate contract financing or invoice payment or if the contractor
becomes aware that the Government has otherwise overpaid on a contract
financing or invoice payment, the contractor shall--
Remit the overpayment amount to the payment office cited
in the contract along with a description of the overpayment; and
Provide a copy of the remittance and supporting
documentation to the contracting officer.
Because issues of overpayment were addressed in FAR case 2005-018,
the Councils did not include additional coverage on contract debt in
the subject FAR Case, except for adding--
Knowing failure to timely disclose significant overpayment
as a cause for debarment/suspension as stated at Subpart 9.4 Debarment,
Suspension, and Ineligibility; and
A cross reference at 3.1003(a)(3) to this new cause of
suspension/debarment at Subpart 9.4.
B. Discussion and Analysis
The FAR Secretariat received 43 responses to the first proposed
rule. The FAR Secretariat received comments on the second proposed rule
from 25 respondents of which 15 respondents had also submitted comments
on the first proposed rule and 10 respondents were submitting comments
for the first time. Overall, 18 of the 53 respondents were from
Government agencies, including many responses from agency Offices of
the Inspector General (OIG).
In the second proposed rule the Councils specifically requested
comments on three issues:
Elimination of the exemption from inclusion of the clause
FAR 52.203-13 for contracts and subcontracts that will be performed
entirely outside the United States.
Elimination of the exemption from inclusion of the clause
FAR 52.203-13 for contracts (and subcontracts) for all acquisitions of
a commercial item under FAR Part 12.
Requirement for mandatory disclosure of violations of the
civil FCA (31 U.S.C. 3729-3733) (in the clause, in the internal control
system required by the clause, and as a cause for suspension or
debarment).
Comments on the second proposed rule that do not relate to these
three issues, unless presenting a new and pertinent perspective, have
not been separately addressed in this preamble.
1. Interrelationship of Previous Final Rule, First Proposed Rule,
Second Proposed Rule, and New Statute
a. Previous Final Rule, FAR Case 2006-007
The first proposed rule under FAR case 2007-006 (``first proposed
rule''), proposed increases to the requirements introduced by final
rule, FAR case 2006-007 (``previous final rule''), in the ways
enumerated in the Background section above. Thirteen respondents
remarked on the relationship to the previous final rule, some
suggesting changes to the previous final rule as well as the first
proposed rule.
i. Like the previous final rule under 2006-007.
No further change needed. One respondent expressed the
belief that the previous final rule is adequate to protect the
Government's interest. Several other respondents supported the previous
final rule's voluntary disclosure. One respondent questioned the need
for the first proposed rule in light of the recent implementation of
``more expansive contractor compliance standards in the FAR.''
The first and second proposed rules enhance the previous
rule. One Government agency explicitly supported the major provisions
of both rules as sound business practices, highlighting their
contribution to cost control as well as mission safety.
Response: No response necessary.
ii. Ethics code. With regard to the requirement for a code of
conduct, one respondent considered that just having a code is
meaningless. Several other respondents also objected to the requirement
for a code of business ethics and conduct in the previous final rule
under FAR case 2006-007, stating that existing contractor ethics
standards work well and that these contractual requirements are
redundant, add costs and other burdens, and are likely to generate
additional uncertainties.
Several respondents objected to the outdated method of
communicating the code, requiring a copy to each employee engaged in
the contract. One respondent recommended that it may be more effective
to refer employees to Web sites or provide tutorials in person, on-
line, or through other means. This suggestion could minimize burdens
through the use of information technology, as requested in the preamble
to the proposed rule for this case.
Another respondent also objected that many institutions have more
than a single code of conduct, each addressing different aspects of
conduct that together cover all aspects of conduct that the FAR rule
requires.
Response: The Councils do not agree that a code of conduct is
meaningless. It can serve several related purposes. For a firm's
business partners, including the Government, it provides a basis for
evaluating the firm's responsibility, including special standards of
responsibility when appropriate. It also provides a basis for internal
policy development, for example human resources policies. And when
something goes wrong, the code is meaningful for enforcement and for
understanding and perhaps incorporating lessons learned.
While requiring establishment of a code will add costs and require
effort on the part of entities that do not have them already, the
Councils agree with several respondents that those resources are
reasonable and justified to mitigate other and larger risks to the
success and efficiency of Government projects. Because many entities
already have made the investment, the rule will level the playing field
in competitive environments.
The Councils agree that flexibility in the method of communicating
the code to employees is appropriate, and the rule has been changed to
require that it be made available to each employee engaged in
performance of the contract. The Councils note that the rule does not
preclude having multiple codes of
[[Page 67067]]
conduct applicable to different segments of contractors' business
lines.
iii. Training.
Training requirement is too burdensome. One respondent was
concerned that the requirements for training could take substantial
time away from performing on their contracts to train staff on an
unknown scope of Federal criminal law. The Government would incur costs
from this activity through delays in the fulfillment of contracts and
increased contractor expenses that will be passed along to customers.
Response: The Councils recognize that contract costs are reflected
in prices, but do not consider schedules to be impacted by this
requirement. By identifying the scope of violations of the Federal
criminal law as those involving fraud, conflict of interest, bribery,
or gratuity violations found in Title 18 of the United States Code, the
Councils believe that the training requirements have been more clearly
defined and the contractor's training requirement has been reduced.
Require training on civil FCA. Several respondents
proposed that Government contractors be required to educate their
employees about the protections available under the civil FCA. The
Department of Justice, Criminal Division (DoJ) suggested that
contractors should also be required to include in their ``business
ethics awareness'' obligation, reflected in the proposed rule at FAR
52.203-13(c)(2)(ii)(F), training on the civil FCA.
Response: The Councils do not agree that it is necessary under this
case to dictate to contractors what they need to cover in business
ethics training. If we highlight education on the civil FCA, or other
specific areas, the contractors may place undue emphasis only on those
areas mentioned in the regulations. The business ethics training
courses may cover appropriate education on the civil FCA, as well as
many other areas such as conflict of interest and procurement integrity
and other areas determined to be appropriate by the contractor,
considering the relevant risks and controls.
iv. Hotline posters. One respondent commented that the physical
display of multiple hotline posters in common work areas is impractical
and wasteful. Another respondent also objects to using hotline posters
on the walls of the institution as being the most effective way of
communication at every institution.
Response: The issue of multiple hotline posters was resolved under
the final rule 2006-007. The requirement for hotline posters is outside
the scope of this case.
b. Relationship of Second Proposed Rule to First Proposed Rule
One respondent questioned whether certain requirements of the first
proposed rule that did not appear in the second proposed rule had been
deleted.
Response: The preamble of the second proposed rule specified that
it included only the sections of the rule affected by the three
changes; it was only addressing three issues, not providing a
completely revised proposed rule. Therefore, the fact that language in
the first proposed rule that would not be affected by the 3 issues of
concern was not repeated in the second proposed rule does not imply
that that language was being deleted.
c. Relationship of Second Proposed Rule to New Statute
One respondent recommends that any disclosure requirement be
limited to violations of the types specified in the ``Closing the
Contractor Fraud Loophole Act (Pub. L. 110-252, Title VI, Chapter 1)''
(i.e., exclude violations of the civil FCA). This respondent also
states that the statute does not require the disclosure to the OIG and
the penalties of debarment/suspension are not required by the new
statute, so should be eliminated.
Another respondent also makes the point that since the new law does
not address disclosure of violations of the civil FCA, that requirement
should not be included in the final rule under this case.
One respondent notes particularly that the new law does not require
the ``reasonable grounds to believe'' standard, reporting to the
Inspector General, or failure to report as an independent basis for
suspension or debarment.
Response: This rule was initiated as a matter of policy. Although
the new statute reinforces and provides a statutory basis for some
aspects of the rule, the fact that any part of the rule is not required
by statute does not alter the rationale that provided the underpinning
for those aspects of the rule. Each aspect of the rule not required by
statute must be considered on its own merits.
2. Mandatory Standards for Internal Control System
a. Minimum Requirements for the Internal Control System
One respondent considered that the previously recommended, now
mandatory, internal control practices will be inadequate if they are
considered to be maximum as well as minimum requirements. Another
respondent considered the establishment of an internal control system
that satisfies a laundry list of mandates will be overly burdensome.
Another respondent would prefer that contractors be left free to choose
to implement the USSG ``in the prudent exercise of their business
discretion,'' rather than being required to do so. Likewise, another
respondent stated that contractors may want to consider the USSG in
designing compliance programs but, absent a statute or Executive order,
they should not be made mandatory in the regulations.
Response: The rule does reflect minimum expectations. Competing
firms are free to establish the highest ethical standards they consider
to be appropriate to the business at hand. This case establishes a
framework for institutional ethics management and disclosure and does
not prescribe specific ethical requirements.
b. Relation of Rule to the USSG
i. Rule is consistent with the USSG. An agency OIG stated that the
proposed rule should benefit Federal contractors. It provides guidance
for contractors consistent with U.S. Sentencing Commission guidance on
effective compliance and ethics programs for organizations. Compliance
with the rule should assist contractors subject to the Sarbanes-Oxley
Act of 2002 in fulfilling their responsibilities under the Act.
Response: None needed.
ii. USSG should be incorporated by reference. Several respondents
commented that rather than using the ad hoc form of the USSG standards
for compliance and ethics program, the actual USSG standards should
simply be incorporated by reference. Conformity with the USSG will
prevent contractors unknowingly failing to comply with all the USSG
although complying with the FAR. Formal adoption of the USSG will
create uniform criteria. A respondent recommended that all the
descriptive paragraphs in (ii) be deleted, instead inserting: ``The
Contractor's internal control system shall provide for a compliance and
ethics program that meets the standards of the Federal Organizational
Sentencing Guidelines, as amended from time to time, United States
Sentencing Commission Guidelines Manual: Sentencing of Organizations,
section 8B2.1.
Response: These respondents would use the USSG Guidelines, in place
of the FAR spelling out the required elements of internal control
systems. However,
[[Page 67068]]
the Councils prefer to spell out the elements. This lets the
contractors know what is expected. The USSG are the source of the FAR
text, but the FAR text is intentionally not adopting them verbatim. The
procurement regulations are not the USSG; the contractor setting up an
internal control system is in a different situation than a company
accused of a crime. Some elements of the USSG are not appropriate for a
procurement regulation. However, by making the minimum requirements
generally consistent with the USSG, the Councils believe that a
contractor should be in a better position if accused of a crime.
iii. Essential parts of the USSG are missing. One respondent
commented that essential parts of the USSG are missing. One example is
the reference to the use of an incentive system in compliance programs
that encourages and rewards companies for implementing effective
programs, following the model of the Organizational Sentencing
Guidelines. The respondent recommends modifying 52.203-13(c)(1)(ii)(E)
by inserting after ``detect improper conduct'' the words ``and
appropriate incentives to perform in accordance with the compliance and
ethics program''.
Another example the respondent uses is the standard for effectively
responding to violations, and taking steps to prevent recurrence.
Without these, a company's program would not be considered effective
under the USSG.
Response: The Councils note that the respondent must have intended
to cite FAR 52.203-13(c)(2)(ii)(E). The Councils do not want to require
incentives for employees within contractors' internal control systems.
This is within companies' discretion. The mitigating factors for
debarment (9.406-1(a)) already include consideration of remedial action
(e.g., (6), (7), and (8)) taken by the contractor.
The FAR does cover responding to violations, and preventing
recurrence, in FAR 52.203-13(c)(2)(i), and throughout (c)(2)(ii).
c. Principals
Several respondents asked for interpretation of the clause
paragraph (c)(2)(ii)(B) requirement that the internal control system
provide for reasonable efforts not to include within the organization
principals whom due diligence would have exposed as having engaged in
conduct that is illegal or otherwise in conflict with the Contractor's
code of business ethics and conduct.''
Is the ``organization'' the entire contractor, instead of
the organization responsible for the code?
Is the code retroactive to catch criminal behavior in the
past?
Is it only Federal crimes, or state and local as well?
What about non-criminal behavior that did not violate the
Contractor's code at the time?
What kind of due diligence is necessary--a simple pre-
employment questionnaire, or instead a costly background check with
interviews of friends and neighbors?
Response:
The Councils have revised the draft final rule (paragraphs
(c)(2)(ii)(A), (B), and (C) of the clause 52.203-13) to eliminate use
of the term ``organization''. This term was a carryover from the USSG.
This rule is addressed to the contractor--the entity that signed the
contract, and subcontractors thereunder.
The code of conduct is not itself retroactive. However, it
is necessary to distinguish conduct of an employee during his/her
employment, from past conduct uncovered during a background check of a
prospective hire. That past conduct need not be disclosed to the
Government, but should be part of the decision whether to hire the
individual.
Past criminal behavior of any type, even criminal behavior
unrelated to contracting, calls into question whether the individual at
the present time has integrity and is a proper role model for company
staff. This is not a mandate to fire the individual, but to determine
whether the individual is currently trustworthy to serve as a principal
of the company.
Behavior that was not criminal and did not violate a
business's code as it existed at the time, is not the subject of this
rule. In response to this comment, the Councils have revised paragraph
(c)(2)(ii)(B) to delete the words ``illegal or otherwise.'' The term
``illegal'' is too broad and could include even a traffic violation.
The Contractor's code of business ethics and conduct should cover the
types of behavior that this requirement is intended to address.
The level of background check required depends on the
circumstances. This is a business decision, requiring judgment by the
contractor.
The source of the FAR clause paragraph (c)(2)(ii)(B) is the USSG
Manual paragraph 8B2.1.(b)(3). The Commentary on this paragraph
includes this statement: ``With respect to the hiring or promotion of
principals, an organization shall consider the relatedness of the
individual's illegal activities and other misconduct (i.e., other
conduct inconsistent with an effective compliance and ethics program)
to the specific responsibilities the individual is anticipated to be
assigned and other factors such as: (i) the recency of the individual's
illegal activities and other misconduct; and (ii) whether the
individual has engaged in other such illegal activities and other such
misconduct.''
d. Periodic Review
One respondent asked for an interpretation of the clause paragraph
(c)(2)(ii)(C) requirement for periodic review of business practices.
For ``monitoring and auditing'', is standard business practice and
generally acceptable accounting principals sufficient? What system for
assessing the ``risk of criminal conduct'' would be sufficient? Is
there a Government program that is an acceptable process?
Response: Standard business practice for ``monitoring and auditing
to detect criminal conduct'' which conforms to generally accepted
accounting principles should be sufficient. The ``monitoring and
auditing'' is amplification of the current FAR requirement for periodic
review and auditing, from the FAR case 2006-007 published in November
2007.
One respondent stated that annual audits of research processes may
already review compliance with policies for ethical conduct of research
funded under Federal contracts. The FAR can acknowledge, through an
Alternate to the clause, that duplication of review is not required
where reviews under other rules already cover the necessary subjects.
Response: The FAR is not requiring wasted duplication of effort. No
change to the regulation is necessary.
3. Mandatory Disclosure to the OIG
Of the 43 respondents that commented on the first proposed rule, 36
commented specifically on sub-paragraph (b)(3) of the clause 52.203-13,
Contractor Code of Business Ethics and Conduct, which requires
mandatory disclosure, in writing, to the agency OIG, with a copy to the
contracting officer, whenever the contractor has reasonable grounds to
believe that a principal, employee, agent, or subcontractor of the
contractor has committed a violation of Federal criminal law in
connection with the award or performance of the contract or any
subcontract thereunder.
Six agency OIGs, as well as several Government agencies all
specifically concurred with the mandatory disclosure of violations by
contractors.
[[Page 67069]]
Other respondents, including agency OIGs, while concurring with
mandatory disclosure, suggested improvements in the way this
requirement is implemented in the rule.
The other 17 respondents that commented specifically on the
mandatory disclosure disagreed with this approach and recommended
voluntary disclosure.
a. Need for Mandatory Disclosure
Note that the following comments in this section all preceded the
enactment of the statute that requires mandatory disclosure, so that
the issues are now primarily moot.
i. Major departure from long-standing policy. One respondent stated
that this rule is a major departure from long-standing and proven
Federal policies that encourage voluntary disclosures. Likewise,
another respondent stated that mandatory disclosure runs counter to
many established Government processes. One respondent considered the
proposed regulation to be a ``sea change'' in the fundamental approach
to compliance followed by the Government. Another respondent noted that
in 1986 a proposal from DoD to make fraud disclosures mandatory
foundered on ``state action'' grounds. In 1988, then Secretary of
Defense Richard Cheney withdrew a proposed rule that would have
governed such programs on the grounds that ``to be meaningful,
corporate codes of conduct must be adopted by contractors voluntarily,
not mandated in procurement regulations (54 FR 30911)''. Another
respondent also cited a 1996 GAO report on the DoD Voluntary Disclosure
Program (GAO/NSIAD-96-21) in which the GAO quotes the DoJ as praising
the DoD Voluntary Disclosure Program.
Several respondents cited the DFARS regulations as being a model
for voluntary disclosure. Several other respondents stated that many
Federal agencies that have considered mandatory disclosure rules have
declined to adopt them in favor of voluntary disclosure programs (e.g.,
Department of Health and Human Services in 2000 (65 FR 40170) and in
2004 (69 FR 46866)).
Response: There is no doubt that mandatory disclosure is a ``sea
change'' and ``major departure'' from voluntary disclosure, but DoJ and
the OIGs point out that the policy of voluntary disclosure has been
largely ignored by contractors for the past 10 years. In addition, in
that same time period mandatory disclosure has been adopted for banks
and public companies and stressed by the U.S. Sentencing Commission and
DoJ, as further discussed in the following sections.
ii. Is voluntary disclosure working? Various respondents stated
that the proposed rule fails to demonstrate that there is a need for
change based on failure of voluntary disclosure. According to these
respondents, neither DoJ nor the Councils have cited data supporting
the claim that voluntary disclosure is not effective. One respondent
stated that a purported paucity of participants in the DoD IG Voluntary
Disclosure Program does not establish a decline in contractor
disclosures to the Government sufficient to justify a mandatory
disclosure requirement. Another respondent stated that DoJ is comparing
the last few years to data from 20 years ago. One respondent cited
disclosures for FY 2005-2007 that are relatively level. Another
respondent cited the December 2006 issue of Corporate Counsel that
voluntary disclosures are increasing rather than decreasing, citing Mr.
Mark Mendelssohn of DoJ and a recent report by Sherman & Sterling. Even
if there is a decline in disclosure under the DoD Voluntary Disclosure
Program, another respondent found that the leap to mandatory disclosure
``gives rise to a perverse implication that justification for mandating
regulations can be asserted simply because no one has shown that the
activity to be regulated is not happening.''
One respondent stated that the assumptions about the reason for the
decrease are misplaced. Another respondent firmly believed that there
is need for analysis of the reasons for any decline in voluntary
disclosures. Even if mandatory disclosures to the DoD IG Voluntary
Disclosure Program are decreasing, several respondents suggested the
following possible explanations:
Less emphasis by DoD.
Fewer reportable violations.
More instances resolved as contract matters, with reports
to contracting officers or heads of contracting activities or to audit
agencies like DCAA and DCMA.
Perception that the Government is slow in processing
voluntary disclosures.
Lack of restrictions on use of disclosure reports in
criminal or civil actions or in administrative actions against
individuals.
One respondent elaborated that there may be fewer voluntary
disclosures because self-governance is working to prevent and detect
contract formation and contract performance issues before they result
in criminality or civil fraud. Reduction in the rate of voluntary
disclosures would be an expected byproduct of improved internal
processes, enhanced training, better internal controls, and an improved
culture of ethics and compliance.
One respondent stated that a number of companies have commented
that delays in processing disclosures to the OIG are a significant
factor in their decision to report problems to the contracting officer
instead of to the DoD Voluntary Disclosure Program.
One respondent suggested other avenues for disclosure that are more
relevant to the kinds of illegal activity being found these days, such
as--
The DoJ Antitrust Division. Voluntary disclosures to DoJ
have increased as disclosures to the DoD IG program have decreased (see
http://www/usdoj.gov/atr/public/speeches/232716.htm#N_1_);
The Department of State Directorate of Defense Trade
Controls. This program has been very successful at inducing voluntary
disclosures (see GAO-05-234 (Feb 2005)); and
Foreign Corrupt Practices Act. Enforcement actions for
violations of the FCPA have also grown, again largely due to voluntary
disclosures made by corporations (see ``U.S. Targets Bribery Overseas
Globalization; Reforms Give Rise to Spike in Prosecutions,'' The
Washington Post (Dec 5, 2007)).
One respondent suggested that mandatory reporting should be
replaced with a strong voluntary disclosure program modeled after the
DoJ Antitrust Division's Corporate Leniency Programs.
Another respondent noted that it is DoJ, not DoD, that apparently
believed that the mandatory disclosure provisions were necessary. This
respondent interpreted this to mean that DoD is satisfied with the
number and types of disclosures being made.
One respondent stated that DoJ should be required to demonstrate
that there is an upward trend of criminal prosecutions of the top 100
Government contractors where it was established that contractor
principals were aware of violations of the law and made a conscious
decision not to disclose those violations to the Government. Similarly,
another respondent suggested that DoJ should offer factual support for
its thesis that crimes are occurring and being found and yet not being
reported voluntarily. One respondent also wanted DoJ to explain why
other less burdensome changes, such as improving the existing voluntary
disclosure programs, cannot be used to achieve the desired result.
On the other hand, in the DoJ letter of May 23, 2007, DoJ stated
that its
[[Page 67070]]
experience suggests that few corporations have actually responded to
the invitation of DoD that they report or voluntarily disclose
suspected instances of fraud. An agency OIG stated that the vast
majority of crimes involving contractors that it investigates are not
reported by the contractor. Another agency OIG stated that Government
contractors are coming forward significantly less frequently with
voluntary disclosures. It considered that this mandatory requirement
may be the most effective way for the Government to monitor its
vendors.
Response: In the DoJ letter dated May 23, 2007, which requested the
Administrator of the Office of Federal Procurement Policy, Mr. Paul
Denett, to open this case, DoJ states that its experience suggests that
few companies have actually responded to the invitation of DoD to
report or voluntarily disclose suspected instance of fraud. The
respondents do not dispute that relatively few contractors are using
the DoD Voluntary Disclosure Program. The contractor groups, in their
public comments on the rule, implicitly concede that the Voluntary
Disclosure program is not being used and blame DoJ and the OIG. Some
claim that informal disclosures are being made to the contracting
officers but offer no specific evidence.
Even if it is true that there are comparatively fewer violations
now than 20 years ago or that some situations are resolved
administratively, there are still significant numbers of violations
occurring and being prosecuted that have not been self-disclosed.
Importantly, the incentive to self-disclose Antitrust violations is
not applicable. Antitrust deals with the Sherman Act and the Clayton
Act, which prohibit conspiracy in restraint of interstate or foreign
trade and regulate practices that may be potentially detrimental to
competition (price discrimination, exclusive dealing contracts, etc.).
Under the Antitrust Division's Corporate Leniency Program, the first
company that reports the violation receives immunity from prosecution.
That type of circumstance does not apply here.
iii. Existing legal requirements and regulations as models for the
rule.
In the DoJ letter of May 23, 2007, DoJ stated that--
Unlike healthcare providers or financial institutions,
there is at present no general requirement that contractors alert the
Government immediately as a matter of routine when fraud is discovered;
DoJ has been careful not to ask contractors to do anything
that is not already expected of their counterparts in other industries;
Our Government's expectations of its contractors has not
kept pace with the reforms in self-governance in industries such as
banking, securities, and healthcare. Several respondents all considered
that for far too long contractors have played by different rules than
their counterparts in other industries, such as health care providers
and research grant recipients. A Government agency commented that
healthcare providers and banks have had such a requirement for many
years. An agency OIG commented that in the past 15 years there have
been significant reforms in industries such as banking, securities, and
healthcare, yet we have not asked the same of Government contractors.
In the DoJ letter of May 23, 2007, DoJ stated that the requested
changes are modeled on existing requirements found in other areas of
corporate compliance such as the Sarbanes-Oxley Act of 2002 and expand
slightly on the Contractor Standards of Conduct in DFARS 203.7000. DoJ
also noted that the National Reconnaissance Office (NRO) has begun
requiring its contractors to disclose contract fraud and other illegal
activities.
a. More far-reaching. However, one respondent stated that the
proposed rule imposes substantially more far-reaching and draconian
disclosure obligations on Government contractors than those presently
made applicable to financial institutions by submission of Suspicious
Activity Reports (12 CFR 21.11). The financial institution has to
report a crime if the financial institution is an actual or potential
victim of the criminal activity. Where a contractor is a victim of a
crime committed by an employee or another person, the employee's
conduct is not imputed to the contractor. Therefore, the corporation
does not incur the risk of criminal liability when it reports an
employee violation and is not incriminating itself.
According to another respondent, the current laws and regulations
are not sweeping and burdensome, but are specific and narrowly focused.
The respondent pointed out that the Anti-Kickback Act and Foreign
Corrupt Practices Act limit their mandatory disclosure to a very
limited class of activity. The respondent also pointed out that
Sarbanes-Oxley contemplates internal reporting mechanisms and review
mechanisms at the highest levels before any reporting occurs. The other
respondent also addressed the internal control certification required
by the Sarbanes-Oxley Act of 2002. Sarbanes-Oxley applies to a
contractor that is a public company. Section 302 of Sarbanes-Oxley does
not require that a public company disclose to the Government conduct it
believes may be a violation of criminal law.
Response: Many of the public comments reveal a basic
misunderstanding of the existing mandatory disclosure requirements
found in the healthcare, banking, and securities areas. Each
requirement effectively mandates disclosure of fraud as broad as the
particular regulatory issue being addressed can reach. Beyond that
limitation, these other requirements are no more limited than the
proposed rule, particularly with the further changes in the final rule
with regard to the types of Federal crimes covered.
In particular, the Councils do not agree with the interpretation of
12 CFR 21.11. 12 CFR 21.11 requires financial institutions to report
suspicious activities committed or attempted against the bank or
involving a transaction or transactions conducted through the bank,
where the bank was used to facilitate a criminal transaction.
Even though Section 302 of Sarbanes-Oxley does not require a public
company to disclose to the Government conduct it believes may be a
violation of criminal law, there are pre-existing securities laws and
regulations that require disclosure to the SEC. Sarbanes-Oxley does not
provide immunity from prosecution for wrong-doing but provides
protection against third-party liability with regard to a lawsuit by
the persons accused of wrongdoing.
b. Conforming the FAR? One respondent stated that if the FAR
Council is relying on conforming the FAR to regulations applicable to
other industries as a justification, the Council should state this
explicitly and provide a detailed analysis of the regulations in other
areas on which it is relying.
Response: The Councils did not rely on conforming the FAR to
regulations applicable to other industries as a justification, but
merely cited some parallels. The FAR regulations are designed to suit
the particular circumstances of acquisition.
c. Particular public need/statutory basis? One respondent stated
that current disclosure programs are not instructive. The respondent
also stated that these programs are targeted towards a particular
public need, and in most cases are the product of legislation that was
enacted in response to a particular public scandal or important
national need. In enacting statutory schemes, Congress saw a particular
need and targeted legislation to address the particular need (Sarbanes-
Oxley, the
[[Page 67071]]
Anti-Kickback Act, the Foreign Corrupt Practices Act, and banking
laws).
Several respondents were concerned that the same justification does
not exist for this proposed rule as the cited statutes and regulations.
One respondent stated that the Council has not provided a rational
basis to explain why such a significant change to the FAR is necessary.
The respondent asserted that the proposed rule could be challenged
under the Administrative Procedure Act (APA) because the FAR Council
has not provided a ``rational basis'' to justify the mandatory
disclosure requirement, nor is there statutory authority behind the FAR
Council to issue a regulation providing for mandatory disclosure of
criminal acts. The respondent therefore concluded that the FAR Council
lacks the authority to issue the regulation (See AFL/CIO v. Kahn, 472
F. Supp. 99 (D.D.C. 1979), rev'd, 618 F. 2d 784 (D.C.Cir. 1979)). One
respondent saw this as particularly important in light of DoJ's
reliance upon the example of other statutorily-mandated disclosure
programs (Sarbanes-Oxley, Foreign Corrupt Practices Act, etc.) as
justification for this regulatory initiative. The respondent stated
that the mandatory disclosure provisions in the proposed rule are
neither the product of specific findings or legislation, nor any
perceived critical national need, and thus are not appropriately
compared to other existing mandatory disclosure programs.
Response: The DoJ proposed a mandatory disclosure program in order
to emphasize the critical importance of integrity in contracting. The
public demands honesty and integrity in corporations with which the
Government does business. If there is concern that there is not a
current public need warranting proceeding with this case, the Councils
cite the public outcry over the overseas exemption in the first
proposed rule and the recent enactment of the Close the Contractor
Fraud Loophole Act (Pub. L. 110-252, Title VI, Chapter 1). The Act
requires exactly what the first rule proposed, except that the overseas
and commercial item exemptions have been eliminated. However, the rule
did not require this legislation in order to have the authority to
proceed in this case. The Councils issue rules under the authority of
the Office of Federal Procurement Policy Act as well as 40 U.S.C.
121(c), 10 U.S.C. chapter 137, and 42 U.S.C. 2473(c). The Administrator
for Federal Procurement Policy may prescribe Governmentwide procurement
policies to be implemented in the FAR (41 U.S.C. 405). This case was
opened at the request of OFPP. This case is making clear what was
already expected. It is not unreasonable or ``capricious'' to require
contractors doing business with the Government to disclose violations
of the civil False Claims Act (civil FCA) or a violation of Federal
criminal law involving fraud, conflict of interest, bribery, or
gratuity violations found in Title 18 of the United States Code that
have occurred in connection with the award, performance, or closeout of
any Government contract performed by the contractor or a subcontract
thereunder. Existing DoJ guidelines addressing corporate prosecution
standards, while certainly not providing amnesty, suggest that if a
company discloses such violations, the prosecution will be of the
individuals responsible for the violation, not the entire organization.
d. Empirical support that mandatory disclosure will achieve the
Councils' objective. One respondent stated that mandating disclosure
without empirical support to show that it will achieve the Councils'
objectives will be susceptible to challenge. The APA requires courts to
strike down rules devoid of factual support. Another respondent also
cited the APA, and that a rule may be set aside if it is arbitrary or
capricious (5 U.S.C. 706).
Response: The Councils point to the testimony from DoJ and various
OIGs that the experience with the NRO mandatory disclosure clause has
been positive (see next paragraph). The Councils further cite the
enactment of the Close the Contractor Fraud Loophole Act (see prior
section), which now mandates many of these revisions to the FAR.
e. The NRO requirement. An agency OIG noted that similar
contractually imposed disclosure requirements have been successfully
implemented by the NRO. According to DoJ, the NRO reports that this
requirement has improved its relationships with its contractors and
enhanced its ability to prevent and detect procurement fraud. Another
agency OIG stated that adoption of the NRO clause resulted in increased
and earlier disclosure of wrongdoing and better working relationships
built upon greater sharing of information and trust. It also led to the
conclusion that it is more effective for a contractor to mandatorily
disclose information pursuant to a requirement, than it is for a
contractor to be in a position of offering up information that it could
be criticized, or even sued, for providing.
One respondent, however, stated that the NRO requirement is not an
appropriate model for all Government contractors because it requires
disclosure of potential illegal activity related to the conduct of
intelligence operations in the interest of national security and thus
is not instructive. In fact, according to another respondent, the
unique nature of the NRO and its responsibilities are major reasons
cited as justification for its disclosure program. Similarly, the other
respondent stated that, while the NRO's mandatory disclosure program
was not the product of legislation, it was the direct product of an
obvious and public awareness that we live in a different world after
September 11, 2001.
Furthermore, several respondents cited problems with the NRO
disclosure program. One respondent stated that ``it is far from clear
at this point whether the NRO mandatory disclosure program is or will
be productive'', citing anecdotal reports from the contractor community
suggesting that the program is not as effective as the NRO claims. One
respondent cited problems experienced by contractors subject to the NRO
OIG reporting clause, claiming that the NRO OIG has inserted itself in
the administration of contracts by using the clause as the basis to
become involved in all aspects of the contractor ethics functions and
corporate investigations. For example, the respondent stated that the
OIG has used this clause to investigate, as a Federal offense, matters
as mundane as employees who have been disciplined for leaving work
early while reporting they were present. The respondent does not
believe that OIG agents should be routinely involved in company
internal ethics functions and contract administration. The respondent
quoted Mr. Paul Denett, Administrator of the Office of Federal
Procurement Policy: ``The IG serves a purpose, but it needs to be
limited to core areas.''
However, the response from the National Procurement Fraud Task
Force (NPFTF), signed by the IG of the NRO, stated that the requirement
for mandatory reporting has worked very well at NRO: The reporting of
wrongdoing has increased, comes earlier, and has led to a good working
relationship. NPFTF considers that this model can have a similar impact
across the Federal Government, and that the situation at NRO is not
unique.
Response: Almost all the agency OIGs submitting public comments
cite the success of the clause initiated by the NRO OIG as a reason for
supporting this rule for their agency procurements.
As to limiting the role of the OIG to its core area, the core area
of the OIG is to investigate fraud, conflict of interest, bribery, and
gratuity violations. OIG agents will not be routinely involved in
company internal ethics functions and
[[Page 67072]]
contract administration unless violations are disclosed. The final rule
has been revised to more closely focus the situations that must be
disclosed by limiting violations of criminal law to violations
involving fraud, conflict of interest, bribery, or gratuity violations
found in Title 18 of the United States Code (see B.3.b.iii.).
iv. Will mandatory disclosure make reporting easier or better? In
the DoJ letter of May 23, 2007, DoJ stated that if the FAR were more
explicit in requiring such notification, it would serve to emphasize
the critical importance of integrity in contracting. An agency OIG
stated that the requirement will simplify the contractors' decision on
whether to disclose suspected violations. Likewise, another agency OIG
stated that the contractor is in a stronger position when reporting for
the purpose of complying with a mandatory requirement than if
voluntarily disclosing information, for which it could be criticized,
or even sued. Another agency OIG commented that making self-reporting a
requirement gives the honest contractor employees necessary leverage
over those who may seek to shield the employer when wrongdoing is
noticed or suspected.
On the other hand, some other respondents believed that if
employees know that everything they report will be passed on to the
Government, this may result in less reporting up the chain of the
company rather than more. One respondent saw substantial potential to
decrease rather than enhance cooperation with company compliance
efforts.
The respondent was concerned that the likelihood of severe
consequences will necessarily change the relationship of the company
and its employees. Every interview will have the potential of resulting
in employees being reported. It may be that investigative targets may
not only be entitled to counsel, but to Miranda warnings, if the
company is deemed to be acting on behalf of the Government. Further,
another respondent was concerned that mandatory reporting may violate
existing contracts with a labor union and may be an unfair labor
practice if imposed without bargaining, citing American Elec. Power
Co., 302 NLRB 161(1991). Resistance by the employees can undercut the
entire compliance program. A respondent also believed that employees
may be reluctant to come forward if they are aware that the contractor
will be required to report their co-workers, or report the company
itself, to the OIG. This respondent cited studies by the framers of the
USSG who undertook significant research addressing these issues.
Response: The Councils believe that by mandating disclosure,
contractor executives and their counsel will be more inclined to make
the required disclosure to the OIG, as opposed to either not disclosing
or informally alerting the contracting officer, who is not in a
position to evaluate the criminal behavior of individual employees. By
mandating disclosure to the OIG, the rule will add weight to the
arguments inside a corporation that good business practices in the long
run favor compliance and disclosure. Nothing in the proposed rule
requires administration of ``Miranda'' warnings. The rule does not
place contractors in the role of law enforcement officers. With regard
to the concerns about labor agreements, contractors can find ways to
disclose without violating labor union provisions that protect
individual privacy of workers.
v. Cooperative atmosphere more effective. According to one
respondent, voluntary disclosure fosters a cooperative environment and
rewards contractors that adopt effective internal controls. Another
respondent considered that it is a key principle to promote self-
governance as the preferred model to ensure compliance. This respondent
quoted the Packard Commission findings in June 1986 that self-
governance is the most promising mechanism to foster improved contract
compliance. Self-governance makes the difference between responsibility
for compliance and a mere facade of compliance. This respondent
concluded that, based on 20 years of experience, both scholars and
industry leaders believe that the current system of voluntary
disclosure encourages companies to develop a stronger culture while
still affording the Government broad remedies to protect the
Government's interests. Under mandatory disclosure, contractors may
focus on the ambiguities of the letter of the rule rather than the
spirit of mutual commitment. One respondent expressed long standing
support for and experience with voluntary self-reporting. It is
concerned that mandatory self-reporting could discourage partnerships
with the Government. One respondent cited the ``fundamental principle''
that contractor compliance programs resulting from internal company
commitments to ethical behavior are more likely to be effective in
preventing illegal behavior than programs imposed by ``overbearing
regulations.''
Response: The Councils disagree. See ``Is voluntary disclosure
working?'' at paragraph B.3.a.ii.
vi. Incentives. Several respondents contended that existing
Government programs and contractor initiatives offer ample incentives
for contractors to voluntarily report procurement violations.
Several respondents pointed out that contractors may
receive favorable consideration in debarment proceedings if they have
voluntarily disclosed the conduct in question.
Several respondents cited the civil FCA, which provides
contractors with an incentive to report potentially fraudulent
behavior. Organizations will voluntarily disclose to avoid lengthy and
costly whistleblower litigation (qui tam actions). According to several
respondents, voluntary disclosure can undermine a court's jurisdiction
to entertain future qui tam cases and can mean the difference between
maximum and reduced penalties.
Several respondents also addressed the reduced penalties
under the guidelines of the USSG, adopted in 1991, which are predicated
on a model of rewarding voluntary reports. Two respondents stated that
the proposed rule is inconsistent with the favorable treatment of
voluntary disclosures under the USSG.
Respondents cited the Deputy Attorney General's January
20, 2003, memorandum, ``Principles of Federal Prosecution of Business
Organizations,'' which provides to Federal prosecutors guidance
governing charging decisions with respect to corporations and
sentencing. Several respondents also cited Deputy Attorney General Paul
J. McNulty's memorandum of December 12, 2006, which demonstrated that
the DoJ considers an organization's voluntary disclosure and
cooperation in determining whether to bring charges.
Various respondents were concerned that the proposed rule may
eliminate the ability of a contractor to claim the benefit of ``timely
and voluntary disclosure'' to the Government. One respondent
recommended that, if the rule is finalized, a contractor should not be
precluded from seeking and receiving leniency because a disclosure is
made in compliance with the rule. One respondent stated that the
proposed rule is not more consistent with the USSG, but actually
contradicts them.
One respondent stated that the Councils must consider these
concerns and evaluate the extent to which eliminating incentives to
voluntary disclosure will affect a contractor's decision to disclose
underlying behavior. The respondent believed that
[[Page 67073]]
eliminating incentives could cause contractors to adopt a protective
posture in the face of evidence of potential criminal behavior.
Another respondent suggested that, instead of mandating compliance
and ethics programs, the Councils should open a new FAR case to develop
an incentive-based approach. This respondent was concerned that the
logic of penalizing contractors for failure to disclose a crime, rather
than offering incentives, will not work. The disclosure obligation
applies only if a crime has already occurred. If there is already a
crime, then the company is already subject to punishment. Failure to
disclose will only be an aggravating factor. So, if a company fails to
disclose, it may escape punishment, but if it discloses, it will likely
still be subject to punishment for the crime committed. Therefore,
punishment for failure to disclose may not be sufficient incentive to
disclose.
Response: There is nothing in this rule that removes any of the
existing incentives. The incentives in the FAR (FAR 9.406-1(a)) and the
USSG are not limited to ``voluntary'' disclosures but to
``disclosures.'' Even if disclosure is ``mandatory,'' incentives will
still be offered to promote compliance.
b. Vagueness of Rule
i. ``Reasonable grounds to believe.'' Numerous respondents were
concerned that the rule does not specify what constitutes ``reasonable
grounds.'' One respondent stated that ``reasonable grounds'' is subject
to varying interpretations, and may be viewed as an even lower standard
than ``probable cause.'' Should the contractor report based on mere
suspicion or based on evidence that criminal activity has occurred?
Because of this lack of clarity, several respondents were concerned
that companies may tie up Government resources with a mountain of
meaningless legal trivia. Numerous respondents stated that there will
be substantial over-reporting because contractors may report even
remotely possible criminal conduct out of an abundance of caution. One
respondent considered that this will raise company costs through the
investigation of baseless claims and incidents. Several other
respondents stated that there will be an enormous amount of time spent
sorting out the true criminal activity and truly significant problems.
One respondent suggested that the proposed rule will potentially
subject an employer to civil actions brought by an employee when the
reports forwarded by the employer to the Federal Government (because
conceivably ``reasonable grounds'' existed) ultimately are determined
to lack merit.
Response: The Councils have replaced ``reasonable grounds to
believe'' with ``credible evidence.'' DoJ Criminal Division recommended
use of this standard after discussions with industry representatives.
This term 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 deciding to
disclose to the Government. See also the following discussion of
``timely disclosure.''
ii. Timely disclosure.
There are 3 aspects of timely disclosure that are of concern to the
respondents:
To which violations/contracts does timely disclosure
apply?
How much time does a contractor have to disclose a
possible violation after first hearing something about it?
How do we transition into this rule? How is timeliness
measured for violations that the contractor may already know about and
did not disclose prior to becoming subject to this rule?
Further, in analyzing these issues, there are 3 separate
requirements for timely disclosure in this rule which may affect the
response to the above questions:
The contract clause requirement to disclose (paragraph
(b)(3)).
The contract clause requirement for an internal control
system (paragraph (c)(2)(ii)(F)).
Failure to timely disclose as a cause for suspension/
debarment regardless of requirement for contract clause or internal
control system (Subpart 9.4).
a. To which violations/contracts does timely disclosure apply?
Various respondents were concerned about whether the rule can apply
to violations that occurred before the effective date of the rule, the
date of the bid, or the date the clause is incorporated into the
contract.
Effective date of the rule. Numerous respondents
recommended that the rule be made applicable only to conduct occurring
on or after the date the rule is effective. The respondents argued that
there is presently no requirement in the FAR for a contractor to
disclose to the Government criminal violations committed by its
employees. The respondents cited case law to support the argument that
application of the rule to conduct occurring before the rule effective
date would be impermissible. One respondent stated that the reporting
requirement should be ``prospective only''. Otherwise this requirement
may impose an unreasonable burden.
Date the clause is incorporated. Another respondent
questions whether the rule is meant to cover past acts, or only acts
going forward from the date the clause is incorporated into a contract.
According to one respondent, to punish entities for past acts would
violate constitutional ex post facto prohibitions.
Date of the bid. One respondent suggested that the
violation would have to occur after the date of the bid.
Several respondents also looked at the end of the period during
which violations that occur must be reported. One respondent suggested
that completion of performance would be appropriate.
DoJ suggested limiting the mandatory disclosure of overpayments or
criminal violations to matters discovered by the contractor within
three years after contract completion.
Response: The first significant point to remember is that in all
cases the reportable violations are linked to the performance of
Government contracts. In the case of the contract clause direct
requirement for contractor disclosure, the reportable violations are
limited to the contract containing the clause. So the questions raised
by the respondents about occurrence of violations are not an issue with
regard to the contract clause disclosure requirement, because
violations would necessarily occur during award or performance of the
contract, through contract closeout, which would necessarily be after
the effective date of the rule and after incorporation of the clause.
(Note: The clause will be included in solicitations and resultant
contracts after the effective date of the rule, in accordance with FAR
1.108(d)).
However, in the case of internal control systems and suspension/
debarment, the proposed rule states that reportable violations could
occur in connection with ``any Government contract.'' This could be
overly broad in two regards--
Does it apply to violations on the contracts of other
contractors?
Does it apply to contracts closed out 20 years ago?
The Councils have made clear in the final rule that this disclosure
requirement is limited to contracts awarded to the contractor (or
subcontracts thereunder). It was not the intent of the proposed rule to
require contractors to report on violations of other contractors under
contracts unrelated to their own contracts.
The Councils do not agree with the respondents who think that
disclosure under the internal control system or as a potential cause
for suspension/
[[Page 67074]]
debarment should only apply to conduct occurring after the date the
rule is effective or the clause is included in the contract, or the
internal control system is established. The laws against these
violations were already in place before the rule became effective or
any of these other occurrences. This rule is not establishing a new
rule against theft or embezzlement and making it retroactive. The only
thing that was not in place was the requirement to disclose the
violation. If violations relating to an ongoing contract occurred prior
to the effective date of the rule, then the contractor must disclose
such violations, whether or not the clause is in the contract and
whether or not an internal control system is in place, because of the
cause for suspension and debarment in Subpart 9.4.
However, the Councils agree that this requirement should not
stretch back indefinitely into the past (e.g., contracts that were
closed 20 years ago). At that point, relevance with regard to present
responsibility has diminished, there is less availability of evidence
to support an investigation, there is more difficulty locating the
responsible parties (who is the contracting officer?), and there should
be some reasonable limitation on a contractor's liability after
contract closeout.
The Councils considered using contract closeout as the end point
for the requirement to disclose fraud, but according to the DoJ, often
contract fraud 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 the DoJ 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.
Therefore, the Councils have added the phrase ``Until 3 years after
final payment on any Government contract awarded to the contractor'' at
9.406-2(b)(1)(vi) and 9.407-2(a)(8), and has added in the clause at
paragraph (c)(2)(ii)(F) the statement that ``The disclosure requirement
for an individual contract continues until at least 3 years after final
payment on the contract.'' To make the applicability during the close-
out phase of a contract clearer, the Councils have revised the draft
final rule in all applicable places to refer to ``award, performance,
or closeout.''
b. Does ``timely'' allow sufficient time between first learning of
the allegation and the disclosure?
One respondent objected that ``timely'' is very broad in scope
which could permit contracting officers to have inconsistent
interpretations of what is timely. One respondent questioned whether
``timely'' means upon first learning of an allegation or only upon
conducting an adequate internal investigation. The respondent
recommended that the regulations should include a set period of time
(i.e., 90 days) for any reporting requirement. Another respondent
recommended that the regulations might allow 60 days to determine if
there are reasonable grounds to conclude that the contractor committed
a crime. The 60 day period would start when a principal of the company
suspects that a crime might have been committed, but lacks reasonable
grounds for concluding that a crime has been committed. An agency OIG
suggested ``timely'' should be replaced with ``within 30 calendar
days.''
Another respondent was concerned that when ``timely'' disclosure
must occur is ambiguous because the timing of a violation is
troublesome. Contractors often settle cases without any admission of
fault or liability. The rise in deferred and non-prosecution agreements
in criminal cases brought by the Government against contractors creates
confusion regarding disclosure of criminal violations.
According to many respondents, the proposed rule may require
premature reporting. One respondent questioned the requirement to
notify without delay, whenever the contractor becomes ``aware'' of
violations of Federal criminal law. According to this respondent, the
rule does not clarify what constitutes ``awareness.'' Several other
respondents were concerned that the proposed amendment does not appear
to allow a contractor to complete an internal investigation before
notifying the OIG and contracting officer. Several respondents
considered that an internal investigation could be compromised by
premature reporting. One respondent recommended that the rule should
allow the contractor the opportunity to comply with its ethics and
compliance program and conduct an internal investigation prior to
disclosure to the Government. Contractors should be required to report
only actual violations of law, not those incidents that have not been
confirmed as actual violations.
One respondent pointed out that existing voluntary disclosure
protocols allow for internal investigation by the reporting parties
before a disclosure is made. Another respondent stated that under the
DoD Voluntary Disclosure Program, if the preliminary investigation
reveals evidence to suggest that disclosure is warranted, contractors
may disclose information sufficient for preliminary acceptance into the
DoD Voluntary Disclosure Program, and then have 60 days to complete a
fuller investigation. This rule provides no guidance on preliminary
steps afforded to a contractor.
One respondent also recommended that the contractor be explicitly
provided with a reasonable period of time to internally investigate a
potential violation.
DoJ suggested that the preamble to the final rule should make clear
that nothing in the rule is intended to preclude a contractor from
continuing to investigate after making its initial disclosure to the
Government. DoJ would expect that the OIG or the contracting officer
will encourage the contractor to complete its internal investigation
and make full report of its findings.
In their comment on the second proposed rule, one respondent
recommends that the preamble should explain that a contractor, with the
contracting officer's approval, may tailor the ``timely reporting''
provision of its internal control system in order to make meaningful
reports to the contracting officer.
Response: First, the Councils note that the new statute uses the
term ``timely'' in setting forth disclosure requirements. The Councils
considered, and rejected, adding a set period of time, e.g., 30 days,
to the disclosure requirement. It was decided that doing so would be
arbitrary and would cause more problems than it would resolve, e.g.,
how to determine when the 30 days begins.
Further, the Councils believe that using the standard of ``credible
evidence'' rather than ``reasonable grounds to believe'' will help
clarify ``timely'' because it 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. Until the contractor has determined the evidence to be
credible, there can be no ``knowing failure to timely disclose.'' 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.
[[Page 67075]]
The Councils note that there is no rigidness to our proposed
requirement to establish an internal control system. The rule just sets
forth minimum requirements. The contractor can use its own judgment in
the details of setting up a system that meets the minimum requirements.
The clause does not require contracting officer approval of this
system.
c. Transitioning into the rule. Meaning of ``timely'' when the
knowledge of credible evidence pre-dates the requirements of this rule.
One respondent stated that the reporting requirement should be
``prospective only''. Otherwise this requirement may impose an
unreasonable burden.
Response: As just discussed, the disclosure requirement is
prospective only. Although violations on the current contract might
have occurred during the pre-award phase and violations on other
contracts may have already occurred prior to establishment of the
internal control system or prior to the effective date of the rule,
timely disclosure of the violation can only be measured from the time
when the requirement to disclose the violation came into effect, even
if credible evidence of the violation was previously known to the
contractor.
With regard to the contractual disclosure requirement, the timely
disclosure would be measured from the date of determination of credible
evidence or the date of contract award, whichever event occurs later.
With regard to the disclosure requirement of the internal control
system, it can only become effective upon establishment of the internal
control system. The violation can have occurred with regard to any
Government contract which is still open or for which final payment was
made within the last 3 years, so may predate establishment of the
internal control system. Therefore, timely disclosure of credible
evidence as required by the internal control system would be measured
from the date of determination by the contractor that the evidence is
credible, or the date of establishment of the internal control system,
whichever event occurs later.
With regard to the knowing failure by a principal to timely
disclose credible evidence of a violation or significant overpayments
as a cause for suspension or debarment, the violation can have occurred
with regard to any Government contract, which is still open or for
which final payment was made within the last 3 years, so may predate
the effective date of the rule. Therefore, timely disclosure of
credible evidence as required by the rule as a cause for suspension or
debarment would be measured from the date of determination by the
contractor that the evidence is credible, or from the effective date of
the rule, whichever event occurs later.
To some extent, the effective date of the rule actually trumps the
other events, because the failure to timely disclose as a cause for
suspension/debarment is independent of the inclusion of the contract
clause in the contract or the establishment of an internal control
system. At least in those instances where disclosure was not timely in
regard to effective date of the rule, but was reported as soon as the
clause was in the contract, or as soon as the control system was in
place, then it would not be a violation of the contract or a mark
against the control system. It could still be a cause for suspension or
debarment, although the Councils consider that suspension or debarment
would be unlikely, if the contractor came forward as soon as the clause
or the internal control system was in place (before that, the
contractor might have been unaware of the requirement to disclose).
iii. ``Criminal violation in connection with contract award or
performance.'' Numerous respondents stated that the rule fails to
specify what constitutes a ``criminal violation'' ``in connection with
contract award or performance''. Some of these respondents made the
following comments:
The broad nature of the phrase ``violation of Federal
criminal law in connection with contract award or performance'' places
a heavy burden. The Government is in the best position to provide
specific guidance to contractors as to the violations that would be
considered covered by this new requirement. Otherwise, each contractor
will have to develop its own list and explanations to its employees as
to what constitutes criminal violations.
If the FAR Council proceeds with the rule, it should
provide a specific list of the criminal violations that the contractor
is required to disclose.
The self-reporting requirements should be revised to
provide the specific circumstances under which self-reporting is
required.
The provision is vague in regard to the type of ``criminal
violation'' covered, leaving open application of the rule to non-
procurement related offenses. If an employee commits a criminal
violation while driving on Federal lands in the course of performing a
contract, must the traffic violation be reported to the agency OIG?
Also, the agency OIGs may receive reports about violations of Federal
tax law or Occupational Safety and Health laws that occur in connection
with the performance of the contract, over which the OIGs do not have
jurisdiction. This can result in unnecessary or inappropriate reports.
The proposed rule does not elaborate on the nexus between
the perceived criminal conduct and the Federal contract so as to
trigger the reporting requirement. A contractor's silence could be
alleged to be a false statement where the employer had ``reason to
believe'' that one of its employees, agents, or subcontractors had
violated criminal law in connection with a contract.
The rule should define more clearly what is reportable and
when the obligation to report is triggered.
One Government agency suggested adding ``potential'' to
``violation.''
DoJ also suggested tightening the standard for disclosure by adding
the phrase ``involving fraud, conflict of interest, bribery, or
gratuity violations found in Title 18 of the United States Code.''
Response: The Councils have adopted the more specific description
of criminal law suggested by DoJ as responsive to many of the concerns
expressed by the respondents.
As to nexus with the contract, the clause stipulates in paragraph
52.203-13(b)(3)(i) that the violation should have occurred ``in
connection with the award, performance, or closeout of this contract,
or any subcontract thereunder.'' With regard to the internal control
system disclosure required in paragraph 52.203-13(c)(2)(ii)(F) and the
cause for debarment or suspension in Subpart 9.4, the violation must be
in connection with the award, performance, or closeout, of any
Government contract performed by the contractor, or a subcontract
thereunder, and the obligation to disclose information lasts until 3
years after final payment. If there is no connection to a Government
contract performed by the contractor, or a subcontract thereunder, then
it need not be disclosed.
The Councils do not consider it necessary to add ``potential'' to
``violation'' because that preceding language already is in terms of
``credible evidence.'' That does not necessarily mean that a violation
has occurred, but the principals are looking for ``credible evidence''
that a violation has occurred. ``Potential violation'' would open it
even wider and could result in too many unnecessary disclosures.
iv. Level of employee with knowledge. Several respondents wanted
the rule to identify the level of contractor employee whose knowledge
will be imputed to the contractor, such that the contractor has the
requisite
[[Page 67076]]
knowledge. Absent such identification, consistent with the doctrine of
respondeat superior applied in Federal criminal law, a contractor may
be deemed to have requisite knowledge warranting disclosure if any
employee at any level is aware of conduct which may constitute a
Federal criminal offense. This could cause a contractor to be accused
of violating the mandatory disclosure provision before the contractor's
management becomes aware of the offense and before the appropriate
steps for disclosure may be undertaken. One respondent stated that it
is unreasonable to expect all knowledge to be passed up the chain.
Several respondents recommended revision of the proposed rule to
require that a contractor principal must have the requisite knowledge
of a Federal criminal law violation before that knowledge will be
imputed to a contractor.
Response: The Councils concur that for debarment and suspension, a
principal must have the requisite knowledge in order for mandatory
disclosure to be applicable. See response under the heading
``Suspension/Debarment'', ``Who has knowledge?'' at paragraph B.5.e.
c. Disclosure to OIG. One respondent considered that the proposed
rule would essentially require contractors and subcontractors to become
fraud detection and reporting entities. Must contractors become experts
in forensic accounting and private investigation? This respondent
considered that the proposed rule essentially would ``deputize''
contractors and subcontractors as agents of the OIG. One respondent
also considered that the company is now acting as an agent of the
Government.
Is ``the agency OIG'' the OIG for the agency which awarded the
contract under which the action in question took place? One respondent
was concerned when contractor is required to disclose to different
inspectors general because the proposed rule is silent on what actions
and procedural safeguards are to be implemented in the various offices
of the Inspectors General. A contractor that deals with a variety of
different Federal agencies will unreasonably be faced with
significantly increased risk and uncertainty.
Several respondents considered that a likely outcome of the
mandatory reporting to the agency OIG will be to remove from a
contracting officer or agency the authority or the ability to settle
and compromise the issues by a disclosure. One industry association
indicated that member companies report that in their experience, the
vast majority of potential violations disclosed to a contracting
officer or other agency official are quickly resolved as an
administrative matter. Once a matter is referred to the DoD OIG as a
potential criminal or civil fraud matter, under the Contract Disputes
Act the contracting officer loses his or her ability to compromise or
settle the issue. One respondent was also concerned about the impact of
the proposed rule on the influence and authority of the contracting
officer. The respondent considered that disclosure to the OIG passes
the leadership role on any subsequent investigation and review to the
OIG's office and undercuts the authority and ability of the contracting
officer to manage contracts.
One respondent noted that under the DFARS rule, the OIG only needs
to be notified when appropriate. One respondent considered that
mandatory notification to the OIG defeats the concept of internal
audits and correction of possible irregularities. The respondent is
concerned that, once the OIG is brought into the process, both the
contracting officer and the contractor/subcontractor lose control of
the process.
One respondent was concerned with the ability of the OIG to handle
an increased level of reports. One respondent stated that their
experience with the capability of the OIG's offices to deal with
complicated, sophisticated and/or fact-intensive issues is very mixed
at best. Current demands have placed substantial strain in the ability
of the OIG's offices to support investigations, and delays are
commonplace. ``According to the respondent, `competing demands for
resources to support overseas investigations and Homeland Security
defense have drained whatever experienced resources existed'' at the
agency OIGs.
An agency OIG suggested replacing ``agency Office of the Inspector
General'' with ``A President-selected and Senate-approved Inspector
General or designated Federal entity Inspector General.'' The agency
OIG stated that this better describes the correct agency to which the
contractor should report potential violations.
Response: There is nothing in the proposed rule that ``deputizes''
contractors. The Councils have concluded that it is appropriate for
contractors to send the reports directly to the OIG, with a copy to the
contracting officer, because it is the OIG that is responsible for
investigating the disclosure.
The disclosure would be to the OIG of the agency that awarded the
subject contract. The Councils have added clarification that if a
violation relates to more than one Government contract, the Contractor
may make the disclosure to the agency OIG and Contracting Officer
responsible for the largest dollar value contract impacted by the
violation. If the violation relates to an order against a
Governmentwide acquisition contract, a multi-agency contract, a
multiple-award schedule contract such as the Federal Supply Schedule,
or any other procurement instrument intended for use by multiple
agencies, the contractor shall notify the OIG of the ordering agency
and the IG of the agency responsible for the basic contract.
Whether OIGs can handle an increase in the level of reporting
depends on the expected level of increase. The Councils do not
anticipate that companies are going to flood the OIG with trivialities,
as some respondents fear. The Council also notes that the agency OIGs
were all strongly in favor of this rule.
The Councils do not agree with the suggestion of one agency IG that
the rule should specify ``A President-selected and Senate-approved
Inspector General or designated Federal entity Inspector General.''
Although this is probably accurate, the Councils consider it too
complicated for some contractors to determine. It is the opinion of the
Councils that, if a contractor submits a report to the wrong OIG, that
OIG will forward it to the appropriate OIG.
Throughout the rule, the Councils have used the words ``disclose''
and ``disclosure'' for consistency, rather than in some places using
the word ``notify'' or ``report''.
4. Full Cooperation
The proposed rule states at paragraph (c)(2)(ii)(G) of FAR 52.203-
XX (now 52.203-13) that a contractor Code of Business Ethics and
Conduct shall, at a minimum, have an internal control system that
provides ``full cooperation with any Government agencies responsible
for audit, investigation, or corrective actions.''
a. Waiver of Privileges/Protections/Rights
Many respondents expressed concern that compliance with the rules
requiring disclosure and full cooperation would be interpreted to--
Require contractors waive an otherwise valid claim of
attorney-client privilege or protections afforded by the attorney work
product doctrine, both protecting attorney-client communications; or
Interfere with an employee's right under the Fifth
Amendment of the U.S. Constitution covering the right of an
[[Page 67077]]
individual not to be compelled to incriminate itself.
One respondent recommended addition of strong language to preserve
privilege protections.
DoJ and an agency OIG indicated awareness of these concerns in
their comments and recommended clarification in the final rule. DoJ
proposed that the final rule state explicitly:
``Nothing in this rule is intended to require that a contractor
waive its attorney-client privilege, or that any officer, director,
owner, or employee of the contractor, including a sole proprietor,
waive his or her attorney-client privilege or Fifth Amendment rights.''
Response: It is doubtful any regulation or contract clause could
legally compel a contractor or its employees to forfeit these rights.
However, the Councils have revised the final rule to provide such
assurance. To address concern that cooperation might be interpreted to
require disclosure of materials covered by the work product doctrine,
the Councils have added a definition of ``full cooperation'' at 52.203-
13(a) to make clear that the rule does not mandate disclosure of
materials covered by the attorney work product doctrine.
For comparison purposes, it is instructive to refer to the flexible
approach adopted in the USSG:
Waiver of attorney-client privilege and of work product
protections is not a prerequisite to a reduction * * * unless such
waiver is necessary in order to provide timely and thorough
disclosure of all pertinent information known to the organization.
It also is worth pointing out the DoD Voluntary Disclosure Program
never required waiver as a condition of participation. Contractors in
that program routinely found ways to report wrongdoing without waiving
the attorney-client privilege or providing their attorney memoranda
reflecting their interviews that normally are covered by the work
product doctrine.
Any limitation in this rule should not be used as an excuse by a
contractor to avoid disclosing facts required by this rule. Facts are
never protected by the attorney-client privilege or work product
doctrine. Moreover, the Fifth Amendment has no application to
corporations, so the only sensitive area is mandatory disclosure or
cooperation by individuals or sole proprietors, which is addressed in
the clarification.
b. Indemnification of Employees
Several respondents expressed concern that full cooperation will be
interpreted as prohibiting a contractor from indemnifying its employees
or their individual counsel to the extent permitted or required by
state law or the contractor's charter or bylaws. Several respondents
expressed concern that the Government may view indemnification of
contractor employees as not cooperating. One respondent asked if there
was a difference between ``cooperation'' and ``full cooperation'' and,
more seriously, whether full cooperation restricted a contractor's
ability to make counsel available to its employees. Several respondents
pointed to the district court opinion in U.S. v. Stein, 435 F.Supp. 2d
330 (SDNY 2006), and 440 F.Supp. 2d 315 (SDNY 2006) that suggests the
Government viewed KPMG's practice of paying for employees' legal costs
pursuant to indemnification rules was not ``cooperation'' favored by
the prosecutors in that case.
Response: With regard to indemnification of employees for legal
costs, State law--not Federal--controls. Just as full cooperation
cannot mean a company forfeits its attorney-client privilege, there is
no reason to think it means employees forfeit their right to
indemnification from their employers. On December 12, 2006, DOJ
addressed this issue in a memorandum sent to all DoJ attorneys by
Deputy Attorney General Paul McNulty (``McNulty Memorandum''), stating:
Prosecutors generally should not take into account whether a
corporation is advancing attorneys' fees to employees or agents
under investigation and indictment. Many state indemnification
statutes grant corporations the power to advance the legal fees of
officers under investigation prior to a formal determination of
guilt. As a consequence, many corporations enter into contractual
obligations to advance attorneys' fees through provisions contained
in their corporate charters, bylaws or employment agreements.
Therefore, a corporation's compliance with governing state law and
its contractual obligations cannot be considered a failure to
cooperate.
c. Requirement to Fire an Employee
One respondent asked that the rule clarify that cooperation does
not mean a contractor must fire an employee.
Response: It is inappropriate for the Government to direct a
contractor to fire an employee, although the Government may require
that an employee be removed from performance of the Government
contract. However, most corporate compliance programs assert that
violation of law or company policy is grounds for dismissal. Also note
the internal control system requirements for principals at paragraph
(c)(2)(ii)(B) of the clause.
d. Ability To Conduct a Thorough and Effective Internal Investigation
Several respondents expressed concern that cooperation or
disclosure will be interpreted to interfere with a contractor's ability
to conduct a thorough and effective internal investigation. Some
respondents were concerned that a contractor continuing to investigate
a matter after reporting would be deemed not cooperating. One
respondent recommended that the rule state explicitly that: ``A
contractor has a reasonable time to investigate a potential
investigation * * * and that nothing in the rule prohibits or restricts
a contractor from conducting an internal investigation.''
Response: Any interpretation of full cooperation that would suggest
a limit on contractors conducting internal investigations would be
clearly at odds with the intent of the rule, which encourages
compliance program investigations, reporting, and cooperation.
e. Defending a Proceeding or Dispute Arising From or Related to
Disclosure
Various respondents expressed concern that full cooperation will be
interpreted to preclude a contractor from defending itself in a
proceeding or dispute arising from or related to the disclosure. One
respondent raised concerns that a rule mandating full cooperation could
be interpreted as prohibiting a contractor from ``vigorously defending
its actions.'' Another respondent observed that full cooperation might
require a contractor to waive its right to appeal the results of an
audit.
Response: Nothing in the rule would foreclose a contractor from
advancing a defense or an ``explanation'' for the alleged fraud or
corruption arising in a Government contract. This includes being free
to use any administrative or legal rights available to resolve any
dispute between the Government and the contractor. The rule is intended
simply to require the contractor to be forthcoming with its customer,
the Government, with regard to credible evidence relating to alleged
fraud or corruption in its Government contracts.
f. Expansion of Audit Rights and Access to Records
Various respondents asked to what extent full cooperation overrode
the limits on Government audit rights and access to records
limitations, giving the Government ``unfettered access'' to individuals
to conduct interviews, even though the current audit access clauses are
limited to documents. Expanding on
[[Page 67078]]
that, one respondent also asked if the rule requires contractors to
give the Government ``full access to their financial and proprietary
information, beyond that required by existing contract clauses.''
Another respondent also observed that the Government may invoke the
requirement in connection with disputes before the Board of Contract
Appeals or U.S. Court of Federal Claims. One respondent requested
clarification that the cooperation requirement applies only to agencies
affected by the conduct and not the entire Government.
Response: The proposed rule was not intended to have any
application or impact on the Government's exercise of its audit and
access to records rights in the routine contract administration context
except as the issue arises when a contractor discloses fraud or
corruption or the Government independently has evidence sufficient to
open an investigation of fraud and solicit the contractor's
cooperation. The issue of contractor cooperation in this rule arises
primarily in the context of Government investigation of contract fraud
and corruption and any application of this rule in any other context by
the Government would be clearly overreaching.
g. Inadvertent Failure as Non-Cooperation
One respondent feared that an ``inadvertent'' failure to provide
documents in a routine DCAA audit would be deemed non-cooperative.
Response: The rule has no application to routine DCAA audits.
h. Need for Definition
Many respondents asked for an expanded definition of ``full
cooperation'' in order to reduce the potential for misinterpretation of
the rule, resulting in the concerns addressed in the preceding
paragraphs.
Response: Contractors are not expected to block Government auditors
and investigators' access to information found in documents or through
its employees in furtherance of a contract fraud or corruption
investigation.
Generally speaking, it is also reasonable for investigators and
prosecutors to expect that compliant contractors will encourage
employees both to make themselves available and to cooperate with the
Government investigation.
That also applies to responding to reasonable Government requests
for documents. Ignoring or offering little attention to detail in
responding to auditor or investigator requests or subpoenas for
documents or information may, in some circumstances, be obstruction of
justice and, if established, certainly would not be deemed full
cooperation.
According to the USSG, cooperation must be both timely and
thorough:
To be timely, the cooperation must begin essentially at
the same time as the organization is officially notified of a criminal
investigation.
To be thorough, the cooperation should include the
disclosure of all pertinent information known by the organization.
--A prime test of whether the organization has disclosed all pertinent
information is whether the information is sufficient for law
enforcement personnel to identify--
--The nature and extent of the offense; and
--The individual(s) responsible for the criminal conduct.
--However, the cooperation to be measured is the cooperation of the
organization itself, not the cooperation of individuals within the
organization. If, because of the lack of cooperation of particular
individual(s), neither the organization nor law enforcement personnel
are able to identify the culpable individual(s) within the organization
despite the organization's efforts to cooperate fully, the organization
may still be given credit for full cooperation.
The DoD Voluntary Disclosure Program described expected cooperation
in some detail in its standard agreement (the ``XYZ Agreement''), and
it may be a useful reference in this circumstance where the contractor
discloses credible evidence of fraud or corruption under this rule.
However, the detail found there goes significantly beyond the scope of
this rule and is best addressed on a case-by-case basis.
The final rule includes a definition that incorporates some of the
concepts in the USSG and the general principle that cooperation must be
both timely and thorough. It is intended to make clear that cooperation
should include all information requested as well as all pertinent
information known by the contractor necessary to complete the
investigation, whether the information helps or hurts the contractor.
Contractors are expected to make their employees available for
Government investigators and auditors investigating contract fraud and
corruption and respond in a timely and complete manner to Government
requests for documents and other information required to conduct an
investigation of contract fraud and corruption. Responding to concerns
expressed by the respondents, the Councils have incorporated the
following definition into the final rule at 52.203-13(a):
``Full cooperation''--
(1) Means disclosure to the Government of the information
sufficient for law enforcement to identify the nature and extent of the
offense and the individuals responsible for the conduct. It includes
providing timely and complete response to Government auditors' and
investigators' requests for documents and access to employees with
information;
(2) Does not foreclose any contractor rights arising in law, the
FAR, or the terms of the contract. It does not require--
(i) A contractor to waive its attorney-client privilege or the
protections afforded by the attorney work product doctrine; or
(ii) Any officer, director, owner, or employee of the contractor,
including a sole proprietor, to waive his or her attorney client
privilege or Fifth Amendment rights; and
(3) Does not restrict a contractor from--
(i) Conducting an internal investigation; or
(ii) Defending a proceeding or dispute arising under the contract
or related to a potential or disclosed violation.
5. Suspension/Debarment
a. New Cause for Suspension or Debarment
Various respondents expressed concern that the proposed rule
establishes failure to timely disclose a violation as a new cause for
suspension or debarment, rather than suspension or debarment just for
the underlying violation.
Response: The requirement for timely disclosure could in some
circumstances be considered a new cause for suspension or debarment.
However, the question of timely disclosure will not come up unless the
Government independently discovers that there has been a significant
overpayment, a violation of the civil FCA, or a violation of Federal
criminal law to be disclosed, that the Contractor knew about and
elected to ignore. It is unlikely that any contractor would be
suspended or debarred absent the determination that a violation had
actually occurred. Present responsibility is the ultimate basis of
suspension or debarment.
b. Unnecessary and Not Good Policy
Many respondents criticized the additional suspension and debarment
coverage in the proposed rule as
[[Page 67079]]
unnecessary and redundant to existing regulations that--
Provide strong incentives for contractors to voluntarily
disclose criminal behavior;
Require a prospective contractor to demonstrate a
satisfactory record of integrity and business ethics; and
Provide a ``panoply of methods for prosecuting and
eliminating those companies that fail to abide by the highest ethical
and legal standards.''
One respondent stated that the proposed suspension and debarment
for ``violation of Federal criminal law'' simply repeats much of what
is contained in FAR 9.406-2 and 9.407-2. Another respondent considered
the suspension and debarment regulations punitive.
Response: As addressed in the preceding paragraph, the added causes
for suspension/debarment add the requirement to timely disclose the
violation and are not duplicative of the violation itself as a cause
for suspension/debarment.
The suspension and debarment policies and standards are not
punitive. The purpose of suspension and debarment is to ensure that the
Government does business only with responsible contractors, not to
punish. This final rule continues to embrace the responsibility
standard.
c. Mitigating Factors
Several respondents were concerned whether the proposed rule
maintains the current scheme of ten mitigating factors at FAR 9.406-
1(a) or renders it meaningless by establishing failure to disclose
itself as a cause for debarment (thus preventing ``voluntary''
disclosure).
Response: The mitigating factors currently at FAR 9.406-1(a) will
continue to be used, and a contractor's timely disclosure to the
Government will continue to be a mitigating factor. As stated in the
response in paragraph B.3.a.vi. ``Incentives'', above, the incentives
in the FAR and the USSG are not limited to ``voluntary'' disclosures
but to ``disclosures.''
Even if disclosure is ``mandatory,'' incentives will still be
offered to promote compliance. The Councils do not recommend any
revision as a result of these comments.
d. Undefined Terms
Many respondents expressed concern that terms such as ``knowing,''
``timely'' ``reasonable grounds to believe,'' and ``overpayment'' are
undefined and will thus put contractors at risk. One Government
respondent suggested adding ``knew, should have known, or'' to ``had
reasonable grounds to believe.''
Response: See responses under paragraph B.3.b.''Vagueness of
rule.'' for discussions of ``timely,'' and ``reasonable grounds to
believe.''
With regard to the term ``knowing failure to disclose'' the
``knowing'' refers to the failure to disclose. ``Knowing failure to
disclose'' was added in the proposed rule to the causes for debarment
at FAR 9.406-2(b)(1)(vi) and the causes for suspension at FAR 9.407-
2(a)(8). Requiring a ``knowledge'' element to the cause for 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. Further, using the standard of
``credible evidence'' rather than ``reasonable grounds to believe''
will help clarify ``knowing'' (See response at ``Vagueness of rule'' at
paragraph B.3.b.i., ``Reasonable grounds to believe'').
The term ``overpayment'' is described in a number of FAR clauses
and provisions and does not require a definition with respect to
suspension and debarment. For further discussion of overpayments, see
response at ``Suspension and Debarment'', paragraph B.5.f. ``Limit or
abandon suspension/debarment for failure to disclose overpayment''.
e. Who has knowledge?
One respondent stated that a contractor should be suspended or
debarred for failing to disclose violations of Federal criminal law
only if a ``principal'' of the company (as defined in the proposed
contract clause) has knowledge of the crime. Failure to disclose crime
should not be a basis for suspension or debarment if lower-level
employees, who are not managers or supervisors, commit a crime and
conceal the crime from the contractor's supervisory-level personnel.
Response: Paragraph (a)(2) of the clause at FAR 52.209-5 defines
``principals'' to mean ``officers; directors; owners; partners; and,
persons 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 Councils agree with the respondent and have revised
3.1003(a)(2), 9.406-2(b)(1)(vi), and 9.407-2(a)(8) to make disclosure
mandatory when a principal of the company has knowledge. The Councils
have also added the definition of a principal at FAR 2.101 because it
now applies to more than a single FAR part, and revised both
definitions to be singular rather than plural.
The Councils note that this definition should be interpreted
broadly, and could include compliance officers or directors of internal
audit, as well as other positions of responsibility.
f. Limit or Abandon Suspension/Debarment for Failure To Disclose
Overpayment
One respondent stated that the proposed ability to suspend or debar
for failure to disclose an ``overpayment'' on a Government contract may
create operational difficulties because contracts are subject to
reconciliation processes with payments audited and adjusted over time.
Likewise, another respondent stated that singling out routine contract
payment issues, which are daily events, with errors on both sides, is
simply unworkable. The respondent cites a situation where a defense
contractor did disclose an overpayment to the payment office, only to
be told that it was wrong, yet was later made the subject of a qui tam
action. Another respondent likewise objected to making reporting of
overpayments grounds for suspension or debarment rather than a matter
of contract administration. The respondent stated that the proposed
rule does not connect overpayments to the criminal law violations upon
which the rest of the proposed rule is focused.
One respondent recommended that the FAR Council should abandon the
proposed changes that would make failure to disclose an ``overpayment''
a new cause for suspension or debarment because a number of current FAR
clauses already require the contractor to disclose specific types of
overpayments, e.g. , 52.232-25, 52.232-26, 52.232-27, and 52.212-
4(i)(5). These clauses treat such overpayments as a matter of contract
administration and do not treat them as a matter of possible fraud and
a basis for suspension or debarment. In addition, the Part 9 provisions
should state explicitly that the cause for suspension or debarment is
for violation of the requirements in FAR 52.232-25, 52.232-26, 52.232-
27, and 52.212-4(i)(5). The respondent noted that the proposed rule did
not demonstrate that the present FAR provisions requiring the
disclosure of overpayments are ineffective.
On the other hand, another respondent stated that contractors
currently have no obligation to report overpayment.
One respondent was more specifically concerned that overpayments
can result from indirect rate variances or similar credits that can
occur years after
[[Page 67080]]
contract performance and that can put the contractor in an over-billed
situation. The severe sanctions that could inure to contractors so
situated seem patently unfair. The respondent suggested either
excluding rate variances or applying the section only to payments made
during or immediately following contract performance.
Another respondent was concerned that this ethics rule creates
potential inconsistency in the treatment of overpayments with the
existing regulatory provisions of the FAR, and recommends deletion of
the issue of ``overpayment'' as a basis for suspension and debarment.
DoJ suggested some answers to these concerns. DoJ considers that a
duty to disclose an overpayment is just as important as the disclosure
of criminal violations, and the requirement to disclose both will save
the contractor from having to decide whether a criminal violation has
in fact occurred in the case of an overpayment. However, DoJ concedes
that a materiality requirement is appropriate to limit the scope of the
requirement to disclose overpayments.
Response: The Councils dispute the allegation that ``contractors
currently have no obligation to report overpayments'' and refers the
respondent to the payment clauses at FAR 52.232-25, 52.232-26, 52.232-
27, and 52.212-4(i)(5). Although other clauses already require
reporting of overpayment, this inclusion of the requirement in Subpart
9.4 to disclose significant overpayments is necessary to make it clear
that, if a contractor does not meet this condition of the contract, it
can be subject to suspension or debarment.
The Councils agree with the suggestion by the DoJ that it is
appropriate to limit the application of suspension or debarment to
cases in which the unreported overpayment is significant. This will
resolve some of the respondents' concerns over routine contract payment
issues. The Councils have revised the final rule to address only
significant overpayments, which implies more than just dollar value and
depends on the circumstances of the overpayment as well as the amount.
Since contractors are required by the Payment clauses to report and
return overpayments of any amount, it is within the discretion of the
suspension and debarment official to determine whether an overpayment
is significant and whether suspension or debarment would be the
appropriate outcome for failure to report such overpayment.
Rate variances do not need to be specifically excluded by the case
because this issue is already taken care of in Part 32 and the Payment
clauses. Rate variances are not considered overpayments until the rates
are determined. The suggestion to apply the section only to payments
made during or immediately following contract performance would not
necessarily exempt rate variances, depending on when the rates are
determined.
Further, the Councils decided to exclude knowing failure to report
overpayments that result from contract financing payments, as defined
in FAR 32.001, as grounds for suspension or debarment. Even though such
overpayments must be reported and returned under the Payment clauses,
these ongoing payments that are not the final payment on a contract are
often based on estimates, and are subject to correction as the contract
progresses. This rule is aimed at the type of overpayment that the
contractor knows will result in unjust enrichment, and yet fails to
disclose it.
The Councils have ensured that there is no overlap or inconsistency
between this final rule and the current FAR requirements relating to
overpayment, as well as the Contract Debt case published as part of
Federal Acquisition Circular 2005-27 on September 17, 2008 (73 FR
53997).
g. Blacklisting
One respondent had a different concern, that the proposed changes
in Part 42 with regard to past performance would allow ``blacklisting''
of contractors through consideration of ``integrity and business
ethics'' in the past performance evaluation without due process
protections. The respondent stated that the suspension and debarment
procedures are the proper means to address responsibility issues.
Response: A contractor's satisfactory record of integrity and
business ethics has long been one of the required elements for
determining that a prospective contractor is responsible (see FAR
9.104-1(d)). The rules for assessing responsibility at FAR Subpart 9.1
provide for sufficient standards to ensure that offerors are treated
fairly. FAR 15.306(b)(1) and (d)(3), and 42.1503(b) give the contractor
the opportunity to comment on adverse past performance. The Councils do
not recommend any change as a result of this comment.
h. Amendment of the Civil FCA
One respondent believed that the proposed cause for suspension/
debarment language effectively amends the civil FCA. The respondent
objected to changing contractors' obligations regarding overpayments
without using the legislative procedure.
Response: The Councils disagree that the rule intended to, or did,
amend the civil FCA outside the legislative process. The civil FCA
provides a legal tool to counteract fraudulent billings turned in to
the Federal Government by encouraging ``whistleblowers'' who are not
affiliated with the Government to file actions against Federal
contractors, claiming fraud against the Government. It also provides
incentives to contractors to self-disclose. This does not preclude the
Government from imposing an obligation on Federal contractors to
themselves disclose to the Government if instances of overpayment are
known to the company principals, and to hold them liable for knowing
failure to disclose such an overpayment. This rule provides another
tool to determine present responsibility of Government contractors.
FAR Subpart 9.4 provides debarment/suspension as a possible
consequence for conviction of or civil judgment for commission of fraud
or a variety of criminal offenses, although those statutes may already
provide criminal or civil penalties for violation thereof. For example,
the Sherman Act (15 U.S.C. 1-7) provides statutory penalties, including
fines and imprisonment, for violation of the antitrust provisions of
the statute. It is not inconsistent with the statute, nor does it
require legislative amendment to include in the FAR that violation of
the Federal statutes in submission of an offer is cause for debarment
or suspension.
i. Technical Corrections
The Councils moved FAR 3.1002(c) to 3.1003(a)(2), because it
presents a requirement rather than just policy guidance. In addition,
the term ``Mandatory'' was removed from the phrase ``Mandatory
requirements'' at 3.1003, because it is redundant. The title of
paragraph (a)(1) of FAR 3.1003 has been amplified to indicate that this
paragraph is describing contractor requirements.
6. Extend to Violation of Civil False Claims Act
a. Support Application to Disclosure of Violations of the Civil FCA
The Department of Justice, Civil Division, which is responsible for
the enforcement of the civil FCA, fully supports the extension of the
proposed rule to require that contractors report violations of the
civil FCA, 31 U.S.C. 3729 et seq., and to provide that the knowing
failure to timely disclose such violations may be grounds for
[[Page 67081]]
suspension or debarment. Various respondents, including agency OIGs,
express support for these provisions.
Response: Concur.
b. Same Issues as Raised With Regard to Other Mandatory Disclosures
Numerous respondents suggested that certain of their objections to
the original proposal to require disclosure of criminal violations and
to make a knowing failure to timely disclose such violations grounds
for suspension or debarment, also apply to an expanded requirement that
contractors disclose civil FCA violations. For example, some commented
that disclosure should not be required because the conduct constituting
violation of federal criminal law or the civil FCA is potentially broad
and subject to varying interpretations by the Government, contractors
and courts (and by relators in civil qui tam suits); that the
requirement that violations be ``timely'' disclosed upon ``reasonable
grounds to believe'' a violation has occurred are subject to varying
interpretations as to when and under what circumstances a violation
must be disclosed; that there is no rational basis for the proposed
rule; that the rule would impose an unreasonable burden on contractors;
and, that knowing failure to timely disclose should not be cause for
suspension or debarment.
Response: These areas of concern common to both criminal and civil
violations are addressed in other sections of this report. As discussed
more fully elsewhere, the Councils have replaced the ``reasonable
grounds to believe'' standard of the proposed rule with a ``credible
evidence'' standard in the final rule, and to specify that the
violation must have a nexus to contract award, performance or close-
out, and to clarify that it is the knowledge of the principal that
triggers the suspension and debarment cause. See responses under
``Vagueness of rule'' at paragraph B.3.b.i. (Reasonable grounds to
believe); B.3.b.ii.(Timely disclosure); B.3.b.iii. (Criminal violation
in connection with contract award or performance); and B.3.b.iv. (Level
of employee with knowledge).
c. Issues Particular to the Civil FCA
i. Difficult to determine if violation has occurred. Several
respondents urged that contractors should not be required to disclose
violations of the civil FCA or be subject to suspension or debarment
for a knowing failure to do so on a timely basis because, they suggest,
the potential misconduct covered by the Act is broad, and the
application of the statute raises many difficult factual and legal
issues that the Government, contractors, relators and courts interpret
in various ways. For example, one respondent argues that the contractor
and the Government are not always aligned on whether a violation of the
civil FCA has occurred, and suggests that it is impractical to assume
that an average contractor employee will know definitively when a
violation of the civil FCA has occurred. Several respondents observe
that that there are many difficult legal and factual issues that arise
in civil FCA matters, such as whether a submission constitutes a
``claim'', whether a statement is ``false,'' and whether the person
making the statement or submitting the claim acted with the requisite
knowledge. Another respondent argues the courts are in conflict over
what conduct constitutes a violation of the civil FCA. Another
respondent considers it unfair to require contractors to make civil FCA
liability determinations given conflicting judicial interpretations of
the civil FCA and the contractor's inability to access relevant facts.
This respondent argues that certain Federal appellate courts and the
United States Supreme Court have read a materiality requirement into
the civil FCA even though that element is not stated explicitly in the
text. One respondent cites a split in the circuits regarding whether an
entity that is subject to complex regulatory requirements can be held
liable under the civil FCA when the entity bases its conduct on a
reasonable interpretation of an ambiguous statute or regulation.
Another respondent states that whereas federal crimes are fairly well-
defined, novel and aggressive interpretations of the civil FCA have
created an environment in which many claims of breach of a contract
might be construed as civil FCA violations.
Based on the premise that violations of the civil FCA are difficult
to define, several respondents concluded that contractors will be
subject to suspension and debarment if the contractor misinterprets the
circumstances and does not report a violation, even if there exists an
honest disagreement about whether a violation of the civil FCA has
occurred.
Response: The Councils do not agree that the requirements of the
civil FCA cannot be reasonably ascertained and understood by
contractors, and expects that contractors doing business with the
Government are taking appropriate steps to ensure their compliance with
that statute and all other applicable laws. The most recent amendments
to the statute were made in 1986, and a significant body of case law
interpreting the statute, and the 1986 amendments in particular, has
developed in that time period. These cases interpret the various
elements of a civil FCA violation, including the definition of a claim,
falsity, knowledge, and damages.
Although the Councils recognize that some issues concerning the
proper application of the civil FCA remain unsettled and subject to
further judicial interpretation, this is not unique to the civil FCA.
Moreover, the disclosure requirement applies only where the
contractor has ``credible evidence'' that a violation of the civil FCA
has occurred. The contractor is subject to suspension and debarment for
failure to timely disclose the violation only where the contractor does
so knowingly. Genuine disputes over the proper application of the civil
FCA may be considered in evaluating whether the contractor knowingly
failed to disclose a violation of the civil FCA.
In this regard, the Councils note that the mere filing of a qui tam
action under the civil FCA is not sufficient to establish a violation
under the statute, nor does it represent, standing alone, credible
evidence of a violation. Similarly, the decision by the Government to
decline intervention in a qui tam action is not dispositive of whether
the civil FCA has been violated, nor conclusive of whether the
contractor has credible evidence of a violation of the civil FCA.
ii. Broad scope of civil FCA. Several respondents suggested that
requiring contractors to disclose violations of the civil FCA
significantly expands the situations in which disclosure must be
considered, and notes that the civil FCA can be violated even in
situations where the Government suffers no financial loss. One
respondent states that the civil FCA encompasses an ``almost limitless
universe of activities.''
Response: The Councils do not agree that requiring disclosure of
civil FCA violations will significantly broaden the situations where
disclosure must be considered. Concerning the suggested breadth of the
civil FCA, please see response to ``Issues particular to the civil
FCA'', at paragraph B.6.c.i. ``Difficult to determine if violation has
occurred''. The first proposed rule required contractors to disclose
significant overpayments and violations of criminal law in connection
with a Government contract or subcontract awarded thereunder, and the
addition of the civil FCA is a natural extension of the rule. When a
claim or payment comes under review, it often is not known at the
outset of the investigation whether the matter is an overpayment, or a
civil or criminal violation. In many cases, the same investigation must
be done to determine the nature of the
[[Page 67082]]
conduct at issue. The same fraud may be actionable under the civil FCA
or its criminal analogs, and require proof of the same general
elements. See, e.g., 18 U.S.C. 287 (criminal False Claims Act); 18
U.S.C. 1001 (false statements).
Moreover, the fact that a course of conduct can violate the civil
FCA even if the Government does not suffer a financial loss does not
mean that disclosure is not relevant to the contractor's present
responsibility. For example, the Government may avoid a financial loss
because a contracting officer alertly catches and declines to pay a
false or fraudulent claim, or perhaps because the false claim is
disclosed by the contractor.
iii. Mitigation in civil FCA for voluntary disclosure. One
respondent argues that there is no need to make failure to timely
disclose a civil violation of the civil FCA a basis for suspension and
debarment because the civil FCA already provides that damages may be
reduced from trebles to doubles where the contractor discloses a
violation to the United States. Another respondent suggests that the
proposed FAR rule would convert these otherwise voluntary disclosures
into mandatory disclosures, thereby preventing contractors from
benefiting from the damages reduction provision of the civil FCA. One
respondent requests that the final rule clarify that any mandatory
reporting obligation is not intended to and does not prevent a
contractor from seeking, and the Government from providing, reduced
damages as a result of a disclosure made in compliance with the new
contract provision.
Response: The Councils do not agree that the reduced damages
available to contractors who disclose violations of the civil FCA in
accordance with that Act obviates the need for the proposed amendment
to make a failure to timely disclose a violation the basis for
suspension or debarment. These provisions address two separate
Governmental interests. The damages provisions of the civil FCA address
the Government's ability to recoup its loss as a result of a violation,
and recognize that timely disclosure is an important means for
mitigating that loss. Suspension and debarment is concerned with the
contractor's present responsibility. Timely disclosure of violations of
the civil FCA is an important indicator of the contractor's present
responsibility.
The mitigating provisions of the civil FCA apply to any disclosure
that meets the requirements set forth in 31 U.S.C. 3729(a)(A). There is
nothing in the FAR rule that would preclude a contractor from meeting
the actual requirements of the reduced damages provision of the civil
FCA. (See response at paragraphs B.3.a.vi. and B.5.c. discussing the
mitigating factors in the USSG and in the FAR.) In its comments to the
proposed rule, the Civil Division of DOJ, which enforces the civil FCA
for the United States, noted that a contractor that meets both the
disclosure requirements of the FAR and the civil FCA ``would receive
the dual benefit of qualifying to seek reduced damages under the civil
FCA and avoiding the potential for suspension and debarment under the
FAR.''
iv. Proposed amendments to the civil FCA. Several respondents
suggest that a contractor making a mandatory disclosure of a violation
of the federal civil FCA risks prompting a potential relator to file a
qui tam suit based on the disclosure, and note that the public
disclosure bar under existing law likely would not bar such a suit.
These respondents further suggest that this risk is increased if
proposed amendments to the civil FCA (S.2041 and H.4854) are enacted
because they would eliminate the public disclosure bar as a
jurisdictional defense to a qui tam suit.
Response: The Councils recognize that mandatory disclosure of a
violation of the civil FCA presents a risk that a qui tam action will
follow. This risk is not unique for disclosures of civil FCA
violations; the same risk arises from disclosures of overpayments and
violations of criminal law. Furthermore, the underlying violation
itself presents a risk of a qui tam action. Timely disclosure of a
knowing violation offers the contractor an opportunity to demonstrate
its present responsibility to avoid suspension or debarment, and to
obtain a reduction in damages under the civil FCA.
v. Healthcare and banking. Several respondents disagreed with the
view expressed by DOJ that the civil FCA reporting requirement imposes
on Government contractors the same disclosure standards as those
required of the healthcare and banking industries, and that no law
requires disclosure of a civil FCA violation.
Response: See response, in paragraph B.3.a.iii.a. under ``Mandatory
disclosure to the OIG'', ``More far-reaching''.
vi. Inherently governmental. One respondent objects that requiring
contractors to disclose violations of the civil FCA to the Government
would force contractors to interpret and enforce Federal law, which
epitomizes an inherently governmental function.
Response: The Councils disagree that the mandatory disclosure
provisions result in a transfer of an inherently governmental function
to contractors. As noted in response B.6.c.i. above, individuals and
entities contracting with the Government are subject to the civil FCA,
and the Government expects that its contractors will take appropriate
steps to ensure their compliance with all applicable laws. Compliance
necessarily requires that contractors interpret the law as it may apply
to their own circumstances and conduct, and this obligation is no
different whether the law is civil or criminal. The Government will
continue to exercise its independent judgment as to the proper
interpretation of the civil FCA, to enforce the civil FCA consistent
with applicable law, and to pursue violations of that law where
appropriate, irrespective of whether those violations are brought to
its attention by a contractor's disclosure or otherwise.
vii. Technical correction. One respondent is concerned that with
addition of disclosure of violations of the False Claims Act, it is not
entirely clear whether the limiting clause ``in connection with the
award or performance of this contract or any subcontract thereunder''
applies to reporting both violations of Federal criminal law and
violations of the civil FCA.
Response: Concur. The Councils have modified the rule accordingly.
7. Application to Acquisition of Commercial Items
a. Support Application to Acquisition of Commercial Items
An agency OIG, in commenting on the first proposed rule, believed
that the responsibility of the contractor to report potential
violations of criminal law or safety issues related to Government
contracts or subcontracts should not be based on contract type and
should not exclude commercial contracts from the reporting requirement.
In response to the question on the expansion of the second proposed
rule to apply to commercial items, various respondents, including many
agency OIGs, support application to contracts for the acquisition of
commercial items.
Response: Concur.
b. Do Not Support Application to Acquisition of Commercial Items
Several respondents state that the proposed rule is inconsistent
with Public Law 103-355 and FAR Part 12.
Another respondent is concerned that application of the proposed
rule to commercial acquisitions will be difficult for educational
institutions to implement.
Another respondent states that DoJ fails to show any deference to
OFPP
[[Page 67083]]
with respect to commercial item policy, asserting without any rationale
or elaboration that there would be no reason to exclude so-called
commercial item contracts. This respondent states that the rule cannot
be applied to commercial items without specific authorization by
Executive Order or statute.
One respondent believes that applying Government-unique clauses to
commercial suppliers will drive them away from the Government
marketplace. Since this respondent recognizes that this is now required
by statute, they will continue to seek a repeal of the statute.
Another respondent recommends against requiring commercial item
contractors to develop new, Government-only ethics standards that
result in a company having two standards of conduct, one for Government
business and one for everything else.
Response: The disclosure requirements of the new statute
specifically apply to commercial items. Furthermore, the statute
includes the words ``pursuant to FAR Case 2007-006 or any follow-on FAR
case'' which the Councils interpret as covering the inclusion of the
civil FCA as addressed in the second proposed rule.
c. Application to Commercial Subcontracts
One respondent questions whether application of the proposed rule
to the business practices of a commercial vendor that has no direct
contractual relationship with the Federal Government has any relevance
to assuring proper stewardship of Federal funds.
One respondent is concerned that without a more distinct definition
of ``subcontractor,'' the flowdown obligation may be applied more
broadly than necessary. The respondent requests additional guidance in
order to distinguish actual subcontractors from entities that may be
contracted to provide collateral services to the commercial contractor
(e.g., service vendors, licensors, corporate subsidiaries).
Further, another respondent states that revision to FAR Subpart
44.4 or FAR clauses 52.212-4 or 52.212-5 and clause 52.244-6 would be
necessary before this requirement can be flowed down to commercial item
subcontractors, but because the proposed rule has neglected to specify
changes, there is no proposed authorization to revise those clauses in
the final rule.
Response: ``Subcontract'' and ``subcontractor'' are defined at FAR
44.101. To clarify the meaning in this context, the Councils have
borrowed from those definitions for use in the text at 3.1001 and in
the clause at FAR 52.203-13.
The Councils are authorized to make any revisions to Subpart 44.4,
Part 12 and Part 44, necessary to conform changes in the final rule, as
long as changes in the final rule are reasonably foreseeable from
either the proposed rule text or the discussions in the preamble. This
constitutes adequate notice to the public. Both the text and preamble
of the May 16, 2008, proposed rule were specific that the rule would
apply to subcontracts. The Councils have made appropriate conforming
changes to 52.212-5 and 52.244-6.
d. Other Concerns
One respondent questions whether the phrase ``if 52.212-4 appears
in this contract'' (52.203-13(c)) is another way of saying it is a
commercial item contract.
Response: Yes, inclusion of clause 52.212-4 in the prime contract
would indicate that it is a contract for the acquisition of commercial
items. However, now that the final rule requires flow down to
commercial subcontracts, this phrase is inadequate for indicating a
subcontract for commercial items, and has been revised accordingly.
e. Comments on the First Proposed Rule That Are No Longer Applicable
One respondent was concerned that the opportunity for substantial
confusion exists with the rule and recommends additional guidance on
how the rule impacts companies selling commercial items under FAR Part
8 acquisitions.
Another respondent was concerned that the proposed language at
3.1004 ``awarded under FAR Part 12'' is likely to be misunderstood as
applying only when the policies of FAR Part 12 are used exclusively and
the procedures in Parts 13, 14, and 15 are not used.
Another respondent was concerned that the proposed rule does not
properly address the exemption for commercial item vendors.
One respondent was concerned that the proposed rule does not
justify imposing the new cause for suspension or debarment based on
failure to disclose a ``violation'', and that will also place
restrictions on commercial contractors that are not required by law and
not consistent with the commercial market place.
Response: These comments are no longer applicable because the
statute now requires application of most of this rule to commercial
item contracts.
8. Application to Contracts To Be Performed Outside the United States
a. Support Application Outside the United States
Four respondents to the first proposed rule questioned the
exceptions for overseas contacts.
DoJ disagreed with excluding contracts performed entirely
outside the United States from the requirements of the rule. The
respondent indicates that the United States is still party to such
contracts and potentially a victim when overpayments are made or when
fraud occurs in connection with the contacts.
One respondent was concerned that the rule exempts
contracts performed overseas without providing an explanation as to why
a basic policy of a code of ethics and business conduct should not
apply overseas.
An agency OIG believed that the responsibility of the
contractor to report potential violations of criminal law or safety
issues related to Government contracts or subcontracts should not be
based on contract type and should not exclude contracts performed
outside the United States from the reporting requirements.
Another agency OIG believed that it is counterproductive
to exclude contracts performed entirely outside the United States
because the United States is still party to such contracts and may be
victimized when overpayments are made or fraud occurs in connection
with those contracts. The respondent also argues the contracts require
greater vigilance because they are performed overseas where U.S.
resources and remedies are more limited; and that the inclusion would
reduce the vulnerabilities that often plague overseas programs and
increase the effectiveness of those programs.
In response to the proposed expansion overseas in the second
proposed rule, various respondents, including several agency OIGs,
support making the requirements of this rule applicable to contracts
and subcontracts performed outside the United States.
Response: Concur.
b. Do Not Support Application Outside the United States
One respondent raised the concern that if any part of the work is
performed outside the United States, labor and privacy laws in Europe
would prohibit mandatory reporting by employees.
Another respondent is concerned that extension of the requirements
to contracts and subcontracts performed
[[Page 67084]]
outside the U.S. will likely have a significant and negative effect on
academic institutions' ability to engage international partners. It is
inappropriate and impractical to expect our international partners to
do business in the same way as U.S. organizations. Many foreign
academic institutions are instrumentalities of foreign governments and
are subject to their own laws and regulations. Without flexibility, it
will be impossible to pursue the international research and education
One respondent also believes that it is unreasonable and
impractical to expect foreign firms to understand and be able to comply
with the unique procedural requirements the U.S. imposes on its
contractors. This respondent recognizes that this is now required by
statute and it will seek a repeal of the statute.
Response: The disclosure requirements of the new statute
specifically apply to acquisitions to be performed outside the United
States. Furthermore, the statute includes the words ``pursuant to FAR
Case 2007-006 * * * or any follow-on FAR case'' which the Councils
interpret as covering the inclusion of the civil FCA as addressed in
the second proposed rule.
9. Other Applicability Issues
a. Educational Institutions
i. Exempt educational and research institutions. One respondent
requested that educational and research institutions be granted the
same exemption afforded small business by making the requirement for a
formal training and/or awareness program and internal control systems
inapplicable to such institutions.
Response: By passing the ``Close the Contractor Fraud Loophole
Act,'' Congress made clear its preference for fewer, rather than more
exemptions. The requirements at 3.1002(b) are that the ethics and
compliance training program be suitable to the size of the entity and
extent of its involvement in Government contracting. Further, this
regulation applies only to contracts using appropriated funds, not to
grants.
ii. Imposition of procurement requirements on grant recipients. One
respondent stated that OMB regulation 2 CFR 215.40 forbids agencies to
impose procurement requirements on grant recipients unless required by
statute or Executive order or approved by OMB.
Response: This rule is not imposing any requirements on grant
recipients. The FAR does not apply to contracts awarded using grant
money. Federal Government grant recipients who are also Federal
Government contractors must comply with both the grant regulations and
the FAR, as applicable.
b. Subcontractors
Various responses were received on the obligations imposed by this
rule between contractors and subcontractors and the flow down of this
rule to subcontractors.
Response: The Councils note that the same rationale that supports
the application of the rule to prime contractors supports the
application to subcontractors. The same reasonable efforts the
contractor may take to exclude from its organizational structure
principals whom due diligence would have exposed as engaging in illegal
acts are the same reasonable efforts the contractor should take in
selecting its subcontractors. Subcontractors should also use those same
reasonable efforts in employment and subcontracting efforts.
i. Obligation to report violations by subcontractors. According to
several respondents, prime contractors should not be responsible for
oversight of their subcontractors and should not be subject to
debarment for failure of a subcontractor to meet the requirement of the
rule. The respondents were concerned that the rule renders prime
contractors police for their subcontractors which respondents consider
unreasonable and burdensome. One respondent was also concerned that
rule creates a contractual obligation on the part of the contractor to
ensure that its subcontractors perform as required by the rule. Another
respondent stated that the rule fails to define the obligation of the
contractor to police its subcontractors with regard to the required
compliance program and integrity reporting. It is unclear what degree
of due diligence the Government expects of the contractor.
Response: There is no requirement for the contractor to review or
approve its subcontractors' ethics codes or internal control systems.
Verification of the existence of such code and program can be part of
the standard oversight that a contractor exercises over its
subcontractors. The prime contractor is subject to debarment only if it
fails to disclose known violations by the subcontractor. Therefore, a
change to the rule is not necessary.
ii. Disclosure through the prime contractor. One respondent was
concerned that the rule mandates that the disclosures go directly to
the Government and not through the prime contractor. DoJ was concerned
that some subcontractors may not be comfortable making disclosure
through the prime contractor and suggested that a mechanism through
which a subcontractor makes a disclosure be addressed in the final
rule.
Response: The clause flow down in paragraph (d)(2) states that in
altering the clause to identify the appropriate parties, all
disclosures of violations of the civil FCA or of Federal criminal law
shall be directed to the agency OIG, with a copy to the contracting
officer. The clause does not require disclosure through the prime
contractor.
iii. Liability for erroneous disclosure. One respondent was
concerned that the rule creates a potential significant liability for
the contractor if disclosures concerning subcontractors turn out to be
in error. The respondent requested the Councils to consider whether
damages assessed against contractors for erroneous reports would be
allowable costs. Also, the respondent was concerned that the rule is
unclear about the disclosure of criminal violations by subcontractors,
and suggests that the Councils revise the rule to make the disclosure
requirements for the contractor and the subcontractor parallel.
Response: The Councils revised the rule to require the contractor
to disclose credible evidence of a violation of Federal criminal law in
connection with the contract or any subcontract under the contract.
This revision provides to the contractor sufficient opportunity to take
reasonable steps to determine the credibility of any possible
disclosure prior to disclosing it to the agency Inspector General and
contracting officer. The potential for erroneous disclosure is
minimized by requiring the contractor to disclose only credible
evidence of violations, thereby reducing the contractor's potential
liability for damages associated with erroneously disclosing alleged
violations which are not substantiated.
c. Small Businesses (See Also Paragraph 11. ``Regulatory Flexibility
Act Concerns'', for Comments on Initial Regulatory Flexibility
Analysis)
i. Support level of applicability to small businesses. An agency
OIG supported the application of the basic requirements of the rule to
small business because the rule avoids imposing unnecessary burdens on
small businesses by creating expensive paperwork requirements.
Likewise, another agency OIG considered the exemption for small
business contractors (from the requirements for a formal internal
control system) reasonable. Another agency OIG also indicated that
undesirable results for small business which could have resulted from
initial drafts of the rule have been mediated by this rule.
[[Page 67085]]
Response: Concur.
ii. Overly burdensome on small business: One respondent believed
that the rule is an overly burdensome and unrealistic policing
requirement that imposes significant new cost requirements and is
particularly burdensome for small businesses; effectively precluding
such businesses from competing for prime contract work or as a high-
tier subcontractor.
Response: Although the rule may have a significant
economic impact on a substantial number of small entities with respect
to the disclosure requirement, the rule is structured to minimize its
impact on small business concerns by making the requirement for formal
training programs and internal control systems inapplicable to small
businesses, and limiting the disclosure requirement of violations of
Federal criminal law to those violations involving fraud, conflict of
interest, bribery, or gratuity violations found in Title 18 of the
United States Code, although the rule did add the reporting of
violations of the False Claims Act. The Councils do not believe that a
change to the rule is necessary.
d. Dollar Threshold or Minimum 120 Day Performance Period
i. Recommend no threshold and no minimum performance period. One
agency OIG commented on the rule's threshold of $5 million and 120-day
performance period. The agency OIG believed that the application of the
rule should not be determined on the basis of the dollar value or the
period of performance of the contract. The respondent was concerned
that, at times, contracting officers have awarded smaller dollar value
contracts or modifications instead of one large dollar contract to
circumvent various thresholds that trigger requirements. The respondent
believed that the public and members of Congress have similar
expectations of all contractors no matter the contract value or type.
Response: The Close the Contractor Fraud Loophole Act (Pub. L. 110-
252, Section 6103) now defines a covered contract for application of
this regulation as any contract in an amount greater than $5 million
and more than 120 days in duration. The Councils also note that,
regardless of whether the clause is included in the contract, the
suspension and debarment provisions in Subpart 9.4 apply to all
contractors, regardless of contract value or duration.
ii. Applicability of thresholds to Federal Supply Schedule (FSS)
contracts and Blanket Purchase Agreements (BPA). One respondent
requests explanation of the applicability of the thresholds to FSS
contracts. The respondent does not believe that FAR 1.108(c) adequately
clarifies the issue. Are the thresholds based on each individual order?
Response: According to FAR 1.108(c), unless otherwise specified, if
the action establishes a maximum quantity of supplies or services to be
acquired, the final anticipated dollar value must be the highest final
priced alternative to the Government, including the dollar value of all
options. That is, if it is anticipated that the dollar value of orders
on an FSS contract will exceed $5 million, then this clause is included
in the basic contract against which orders are placed.
e. Single Government Standard Also Applicable to Grants
One respondent was concerned that multiple Federal agencies already
have compliance guidelines and regulations in place, or in development,
and believes the rule may be inconsistent with other Federal agency
requirements. The respondent requested that a single Federal
Government-wide standard be created to foster integrity and honesty
that applies to both Government contracts and Federal grants.
Response: The Councils acknowledge the respondent's concern.
However, this rule establishes a Government-wide standard for
contractor compliance programs and integrity reporting with respect to
Government contract awards. Under the rule, all Federal agencies will
be required to implement the same requirements in the same manner
consistent with the award of Federal contracts. However, the rule does
not and is not intended to address contractor compliance programs and
integrity reporting with respect to agency grant-making procedures.
Given the legal differences between a grant and a contract that concern
performance and termination for default, the creation of a single
Government standard addressing contractor compliance programs and
integrity reporting is not practical and is outside the scope of the
rule.
10. Additional Recommendations
a. Defer Final Rule Until
i. More experience with 2006-007. One respondent suggested that the
FAR Council evaluate experience with the final rule, before proposing
changes. The FAR Council should withdraw the proposed rule in favor of
allowing covered contractors to implement the November 23, 2007, final
rule.
ii. Completion of the National Science and Technology Council
initiative. Several respondents urged the FAR Council to defer further
action on proposed FAR Case 2007-006 pending completion of the National
Science and Technology Council (NSTC) initiative to develop compliance
guidance for recipients of Federal research funding from all agencies
across the Federal Government.
iii. Further action on related legislation that would expand the
scope of the civil FCA. One respondent requests postponement until
after enactment of pending legislation on the civil FCA.
iv. Public hearings. One respondent alternatively suggests
additional public comment in light of the pertinent intervening
legislation and public hearings.
Response: The intervening legislation requires implementation of
this rule in the FAR within 180 days of enactment of Pub. L. 110-252
(by December 26, 2008). Therefore, the Councils will proceed with this
rule without delay.
At the time of publishing the final rule (2006-007), the proposed
rule (2007-006) under this case had already been published. The
preamble of the final rule under 2006-007 stated the intent to address
mandatory disclosure and full cooperation under the follow-on rule.
It is unknown when the NSTC initiative to develop compliance
guidance for recipients of Federal research funding from all agencies
across the Federal Government will be completed. The Councils do not
agree to delay the FAR rule pending the outcome of this particular
initiative. Often the regulations for grants use the FAR as a model.
b. Expand Policy and Clause to Cover Overpayments
DoJ and an agency IG commented that the drafters of the proposed
rule neglected to incorporate ``knowing failure to timely disclose an
overpayment'' in the first reference at 3.1002(c).
Several respondents proposed that the language in the proposed FAR
clause be expanded to also include instances of overpayment. More
inclusive language removes any ambiguity (and loopholes) about what
should be revealed to the Government. By expanding the scope to include
overpayments, contractors are no longer asked to label (or mislabel)
their activity as ``criminal''. In the opinion of the respondents, the
proposed rule does not match the stated objective of encouraging
Government notification of fraud and overpayments.
Response: The mandatory reporting of overpayments is addressed in
the
[[Page 67086]]
Payments clauses. However, to aid in clarity, we have added a cross
reference at FAR 3.1003 to the Payment clauses and the knowing failure
to timely disclose significant overpayments as a cause for suspension/
debarment in FAR Subpart 9.4.
c. Create a Contractor Integrity and Business Ethics Information
Section in FAR Part 42
One respondent urged the FAR Councils to create a contractor
integrity and business ethics section in FAR Part 42 that would require
Government officials to record and maintain integrity and business
ethics information that can be shared with Government officials.
Although contractor performance and responsibility are part of FAR
Subpart 9.1, the respondent requests that distinctive data and
information be collected on each.
Another respondent, on the other hand, is very satisfied that the
rule only proposed one change to the contractor past performance
information in FAR 42.1501, and properly reinforces the existing
emphasis on contractor cooperation across a broad range of contract
administration matters, including cooperation with investigations.
Response: The proposed rule has added a cross reference in Part 42
to promote the inclusion of business integrity in past performance. The
request to collect distinctive data and information on contractor
responsibility is outside the scope of this rule. The past performance
databases are controlled by the agencies. (See also response to
``Suspension/Debarment'', paragraph B.5.g. ``Blacklisting'')
d. Add Safety Issues
An agency IG suggested that safety issues should be included in the
mandatory disclosure requirement.
Response: Adding explicit coverage of safety issues is outside the
scope of this case.
e. Protection of Contractor Disclosures
The proposed rule states at 3.1002 (Policy) that contractors should
have an internal control system that facilitates timely discovery of
improper conduct in connection with Government contracts. A contractor
may be suspended or debarred for knowing failure to timely disclose a
violation of Federal criminal law in connection with the award or
performance of any Government contract performed by the contractor.
DoJ suggested that, in order to encourage contractors to submit
information, the Councils may wish to recommend to agencies that the
submitted information be maintained confidentially to the extent
permitted by law and that any disclosure of the information under FOIA
should only be made after full consideration of institutional,
commercial, and personal privacy interests that could be implicated by
such a disclosure. In particular, agencies should be mindful that the
Trade Secrets Act operates as a prohibition on the discretionary
disclosure of any information covered by Exemption 4 of the FOIA,
unless disclosure is otherwise authorized by law.
Response: The Councils have added the following provision to the
final rule, similar to the provision employed by the DoD Voluntary
Disclosure Program (DoD Directive 5106.01, April 23, 2006) in ``XYZ''
agreements with contractors pursuant to DoD Voluntary Disclosure
Program Guidance (IGD 5505.50, CIPO, April 1990) (see http://
www.dodig.mil/Inspections/vdprogram.htm): ``The Government, to the
extent permitted by law and regulation, will safeguard and treat
information obtained pursuant to the contractor's disclosure as
confidential where the information has been marked ``confidential'' or
``proprietary'' by the company. To the extent permitted by law and
regulation, such information will not be released by the Government to
the public pursuant to a Freedom of Information Act request, 5 U.S.C.
section 552, et. seq., without prior notification to the contractor.
The Government may transfer documents provided by the contractor to any
department or agency within the Executive Branch if the information
relates to matters within the organization's jurisdiction.''
The addition of the above provision will provide appropriate
assurance to contractors about the Government's protection afforded to
disclosures.
11. Regulatory Flexibility Act concerns
a. IRFA Does Not Identify a Rational Basis for the Rule
Several respondents criticized the Initial Regulatory Flexibility
Analysis (IRFA) as deficient because they believe that it does not
identify a rational basis for the rule. They claim that there is no
empirical or anecdotal evidence to explain why the mandatory disclosure
requirement is required for the proper functioning of the procurement
system.
Response: See response to ``Mandatory disclosure to the OIG'',
``Empirical support that mandatory disclosure will achieve the
Councils' objective'', at paragraph B.3.a.iii.d.
b. The IRFA Underestimates the Number of Small Businesses Affected and
the Associated Costs
Several respondents also considered that the IRFA underestimates
the number of small businesses affected, as it only describes the
estimated 28 small businesses which conclude that disclosure is
required, rather than the larger number which will have to conduct
internal investigations before concluding that disclosure is not
required. One respondent pointed out the costs to run a compliance
program. Another respondent pointed out that the IRFA does not
ascertain the costs when a company chooses to retain outside counsel to
investigate, which could range from $1 million to $20 million. The rule
will cost small businesses over $1 billion a year (calculation--for
each report there would be 5 internal investigations at a cost of $5
million per contractor and $2.5 million per subcontractor.)
Response: First, the IRFA estimated an impact on 45 small
businesses, not just the 28 covered by the clause.
Second, an ethical company that learns that an employee may have
committed a violation of Federal criminal law would not ignore this
information. A company would normally investigate allegations of
wrongdoing within the company as a sound business practice. If there
was clearly no violation, the investigation would be short. Although
the rule allows contractors time to take reasonable steps to determine
that evidence of wrongdoing is credible, it does not direct contractors
to carry out any particular level of internal investigation. The IRFA
focused on the effort which results from this rule--disclosure to the
Government--although there are other incentives outside this rule which
could cause a contractor to voluntarily disclose violations to the
Government, such as the U.S. Sentencing Guidelines. Although the IRFA
does not include the cost of the investigation in its calculations, the
FAR does not require or envision a small business paying millions of
dollars for an investigation. The respondent's calculated cost
estimates are not supported or credible.
The FAR did give relief for the costs of running a compliance
program by leaving it to the discretion of the small business and
paragraph (c) of the clause is not mandatory for small businesses.
[[Page 67087]]
c. Imposition of Suspension and Debarment Will Disproportionately
Damage Small Businesses
One respondent stated that small businesses do not have the
resources that large businesses do. They do not have the resources to
institute compliance programs. They are more likely to be caught in the
suspension and debarment process. They lack the leverage to negotiate
agreements in lieu of debarment. Therefore, the rule's reliance on
suspension and debarment as an enforcement mechanism will
disproportionately damage small businesses.
Response: The Councils agree that small businesses often have fewer
resources than other than small business. Nonetheless, the Councils
cannot give further flexibility here. The Councils have already
eliminated the requirement for the internal control system for small
businesses. The Councils cannot establish a different suspension or
debarment standard for small businesses.
d. Estimate of Small Businesses That Would Disclose if No Mandatory
Requirement
One respondent quoted the IRFA as estimating that, in the absence
of the proposed disclosure requirement, 1 percent of small business
contractors that are aware of a violation would voluntarily report it.
This suggests, according to the respondent, that the FAR Council
believes that mandatory disclosure would lead to a 100-fold increase in
the number of reported violations. The respondent states that there is
no support for this estimate and no rational basis to support a claim
that this disclosure requirement is needed for the effective
functioning of the procurement system.
Response: The respondent has drawn an unwarranted conclusion about
the estimated impact of mandatory disclosure. The estimated 1%
disclosure rate in the IRFA is for small businesses that do not have
the clause in their contract (i.e., small dollar value or short
performance period). There was no estimate in the IRFA about what
percentage of this population would disclose if the clause were
included. Further, any estimates about this segment of the population
cannot be extrapolated to a conclusion about the effect of mandatory
disclosure requirements on higher dollar value, noncommercial contracts
or contracts with large businesses.
e. Recordkeeping Requirements
One respondent objected that the IRFA did not provide a full
discussion of the projected recordkeeping and compliance requirements.
Good business sense will require a contractor to develop and keep more
records for the purpose of documenting its investigation.
Response: The Councils agree that recordkeeping would be wise, but
the rule does not require recordkeeping beyond the recordkeeping that
would be part of the contractor's normal business practices. Under 5
U.S.C. 601, the term ``recordkeeping requirement'' is defined as a
requirement imposed by an agency on persons to maintain specified
records.
f. Duplication, Overlap, or Conflict
Several respondents criticized the statement in the IRFA that the
rule does not duplicate, overlap, or conflict with any other Federal
rules. The respondents state that the IRFA--
Ignored the obvious interrelationship with the civil
Federal civil FCA and its qui tam provisions;
Did not address the inconsistency between the proposed
rule and the Federal Sentencing Guidelines; and
Did not address that the rule is inconsistent with a
voluntary disclosure being a mitigation consideration in the FAR
debarment and suspension proceedings and under the civil FCA because
disclosure would be mandatory rather than voluntary.
Response: Under 5 U.S.C. 601, ``rule'' is defined as meaning ``any
rule for which the agency publishes a general notice of proposed
rulemaking pursuant to section 553(b) of this title or any other law *
* * ''. Codified laws are not a rule. The Sentencing Guidelines are,
strictly speaking, also not a rule. However, the Councils disagree that
this rule is duplicative of the civil FCA. Any inadvertent
inconsistency with the Guidelines has been considered in formulating
this final rule.
Regarding mitigation and voluntary disclosure, see ``Mandatory
disclosure to the OIG'', ``Incentives'' at paragraph B.3.a.vi.
12. Paperwork Reduction Act (PRA)
a. Burden Underestimated
One respondent stated that the Councils' Paperwork Reduction Act
analysis is inadequate. The estimates are so conservative as to be
unrealistic. If it only takes 20 hours to conduct pre-disclosure review
and draft a corresponding report, why does it take the Government a
year to decide whether to intervene in a traditional qui tam case? The
respondent points out that ``burden'' includes all aspects of the
reporting process, including the separation of reportable events from
non-reportable events.
Another respondent also considers the estimated burden of 3 hours
per report woefully inadequate, considering the time needed by
respondents to investigate and determine whether a civil FCA violation
or criminal violation occurred.
Response: Burden includes estimated hours only for those actions
which a company would not undertake in the normal course of business.
The Government does not direct companies to investigate. In the normal
course of business, a company that is concerned about ethical behavior
will take reasonable steps to determine the credibility of allegations
of misconduct within the firm. It is left to the discretion of the
company what these reasonable steps may entail. The Government has
added the requirement to disclose to the Government when credible
evidence of misconduct is obtained, which would not necessarily
otherwise occur. The estimated hours in the regulatory flexibility
analysis and the paperwork burden act analysis are to cover the hours
required for preparing and reviewing the disclosure to the Government
when credible evidence has been obtained. The estimated hours must also
be viewed as an average between the hours that a simple disclosure by a
very small business might require and the much higher numbers that
might be required for a very complex disclosure by a major corporation.
However, upon further discussion with subject matter experts, the
Councils have revised the estimated hours to 60 hours per response,
considering particularly the hours that would be required for review
within the company, prior to release to the Government.
b. Recordkeeping and Other Compliance Requirements
One respondent stated that the projected recordkeeping and
compliance requirements are far more burdensome than reflected in the
IRFA. The contractor must keep and maintain extensive records any time
it investigates allegations or suspicions of violations. Even if a
company determines that disclosure is not required, the contractor must
keep records of its decision-making process in order to defend against
possible future accusations of failure to disclose.
Another respondent states that time is required for 1400 covered
contractors to establish systems for complying with this regulation.
[[Page 67088]]
Response: See the response in previous section on Regulatory
Flexibility Analysis (B.11.).
c. Data and Methodology Should Be Made Part of the Rulemaking Record
Response: The public can request copies of the supporting
statements.
13. Executive Order 12866
a. Significant Rule
A number of respondents are concerned that this rule is a
significant rule in accordance with E.O. 12866 section 3.(f). One
respondent is concerned that, by extending the rule to cover commercial
acquisitions and overseas contracts, a review requirement as a ``major
rule'' or a significant rule under section 3.(f)(1) may have been
unintentionally triggered. Another respondent believes that the rule
should have a cost-benefit analysis.
One respondent states that the addition of violations of the civil
FCA as a ground for mandatory disclosure is sufficient standing alone
to trigger review under Section 6(b) of E.O. 12866.
Another respondent submits that this is a significant regulatory
action because it will, among other things, adversely affect in a
material way a sector of the economy (Government contractors).
Several respondents also state that the second proposed rule raises
important legal and policy issues, another grounds for the Office of
Information and Regulatory Affairs (OIRA) to declare a rule significant
under E.O. 12866, under section 3.(f)(4).
One respondent suggests that it was a Freudian slip when the FR
notice for the first proposed rule stated that the first proposed rule
was a significant regulatory action and therefore was not subject to
review.
Response: The first proposed rule was declared to be a significant
rule by OIRA. The typographical error was in the second half of the
sentence, not the first. The rule was subject to review under the
Executive order and was so reviewed. OIRA did not declare the second
proposed rule to be a significant rule.
All rules are sent through the Office of Information and Regulatory
Affairs for determination as to whether the rule is significant. OMB's
Office of Information and Regulatory Affairs has determined this is a
significant rule, and not a major rule.
b. Violates E.O. 12866
One respondent states that the proposed rule violates the E.O.
12866 requirement that rules be ``consistent, sensible, and
understandable'' and that agencies promulgate only such regulations as
are required by law, are necessary to interpret the law, or are made
necessary by compelling public need. This respondent submits that just
because DoJ wants to make its job easier is not sufficient grounds for
rulemaking.
Response: This rule is required by law and by compelling public
need. The Councils have made every effort to make the draft final rule
consistent, sensible, and understandable.
This is a significant regulatory action and, therefore, was subject
to review under Section 6(b) of Executive Order 12866, Regulatory
Planning and Review, dated September 30, 1993. This rule is not a major
rule under 5 U.S.C. 804.
C. Regulatory Flexibility Act
The Regulatory Flexibility Act, 5 U.S.C. 601, et seq., applies to
this final rule. The Councils prepared a Final Regulatory Flexibility
Analysis (FRFA), and it is summarized as follows:
1. Statement of the need for, and objectives of, the rule.
This rule amends the Federal Acquisition Regulation to require
Government contractors to--
Establish and maintain specific internal controls to
detect and prevent improper conduct in connection with the award or
performance of any Government contract or subcontract; and
Notify without delay the agency Office of the Inspector
General, with a copy to the contracting officer, whenever, in
connection with the award, performance, or closeout of a Government
contract awarded to the contractor or a subcontract awarded
thereunder, the contractor has credible evidence of a violation of
Federal criminal law involving fraud, conflict of interest, bribery,
or gratuity violations found in 18 U.S.C. or a violation of the
civil False Claims Act.
This case is in response to a request to the Office of Federal
Procurement Policy from the Department of Justice and Public Law
110-252. Based on the requirements of Pub. L. 110-252, the rule was
expanded to include the clause 52.203-13 in contracts performed
overseas and contracts for the acquisition of commercial items.
The objective of the rule is to emphasize the critical
importance of integrity in contracting and reduce the occurrence of
improper or criminal conduct in connection with the award and
performance of Federal contracts and subcontracts.
2. Summary of the significant issues raised by the public
comments in response to the initial regulatory flexibility analysis,
a summary of the assessment of the agency of such issues, and a
statement of any changes made in the proposed rule as a result of
such comments.
a. IRFA does not identify a rational basis for the rule. Several
respondents criticized the Initial Regulatory Flexibility Analysis
(IRFA) as deficient because they believe that it does not identify a
rational basis for the rule. They claim that there is no empirical
or anecdotal evidence to explain why the mandatory disclosure
requirement is required for the proper functioning of the
procurement system.
Response: DoJ and various OIGs provided testimony that the
experience with the National Reconnaissance Organization mandatory
disclosure clause has been positive. Further, enactment of the Close
the Contractor Fraud Loophole Act (Pub. L. 110-252, Sec VI, Chapter
1) now mandates many of these revisions to the FAR.
b. The IRFA underestimates the number of small businesses
affected and the associated costs. Some respondents considered that
the IRFA underestimates the number of small businesses affected, as
it only describes the estimated 28 small businesses which conclude
that disclosure is required, rather than the larger number which
will have to conduct internal investigations before concluding that
disclosure is not required. Respondents pointed out the costs to run
a compliance program and that the IRFA does not ascertain the costs
when a company chooses to retain outside counsel to investigate,
which could range from $1 million to $20 million. The rule will cost
small businesses over $1 billion a year (calculation--for each
report there would be 5 internal investigations at a cost of $5
million per contractor and $2.5 million per subcontractor).
Response: First, the IRFA estimated an impact on 45 small
businesses, not just the 28 covered by the clause. Further, an
ethical company that finds out an employee may have committed a
violation of Federal criminal law would not ignore this. A company
would normally follow up allegations of wrongdoing within the
company as a sound business practice. If there was clearly no
violation, the investigation would be short. Although the rule
allows contractors time to take reasonable steps to determine that
evidence of wrongdoing is credible, it does not direct contractors
to carry out any particular level of internal investigation. The
IRFA focused on the effort which results from this rule--reporting
to the Government. Although there are other incentives outside this
rule which could cause a contractor to voluntarily disclose
violations to the Government, such as the U.S. Sentencing
Guidelines. Although the IRFA does not include the cost of the
investigation in its calculations, the FAR does not require or
envision a small business paying millions of dollars for an
investigation. The respondent's calculated cost estimates are not
supported or credible.
The FAR did give relief for the costs of running a compliance
program by leaving it to the discretion of the small business;
paragraph (c) of the clause is not mandatory for small businesses.
c. Imposition of suspension and debarment will
disproportionately damage small businesses. A respondent stated that
small businesses don't have the resources that large businesses do.
They do not have the resources to institute compliance programs.
They are more likely to be caught in the suspension and debarment
process. They lack the leverage to negotiate agreements in
[[Page 67089]]
lieu of debarment. Therefore, the rule's reliance on suspension and
debarment as an enforcement mechanism will disproportionately damage
small businesses.
Response: The Councils agree that small businesses have fewer
resources than other than small businesses. Nonetheless, the
Councils cannot give further flexibility here. The Councils have
already eliminated the requirement for the internal control system
for small businesses. The Councils cannot establish a different
suspension or debarment standard for small businesses.
d. Estimate of small businesses that would report if no
mandatory requirement. One respondent quoted the IRFA as estimating
that, in the absence of the proposed disclosure requirement, 1% of
small business contractors that are aware of a violation would
voluntarily report it. This suggests, according to the respondent,
that the FAR Council believes that mandatory disclosure would lead
to a 100 fold increase in the number of reported violations. The
respondent states that there is no support for this estimate.
Response: The respondent has drawn an unwarranted conclusion
about the estimated impact of mandatory disclosure. The estimated 1%
disclosure rate in the IRFA is for small businesses that do not have
the clause in their contract (i.e., small dollar value or short
performance period). There was no estimate in the IRFA about what
percentage of this population would report if the clause were
included. Further, any estimates about this segment of the
population cannot be extrapolated to a conclusion about the effect
of mandatory disclosure requirements on higher dollar value
contracts of duration more that 120 days or contracts with large
businesses. The number of small businesses affected cannot be known
exactly because there is no data at this time on disclosures that
will result from this rule, but the numbers represent the best
estimate of subject matter experts in the Government.
e. Recordkeeping requirements. One respondent objected that the
IRFA did not provide a full discussion of the projected
recordkeeping and compliance requirements. Good business sense will
require a contractor to develop and keep more records for the
purpose of documenting its investigation.
Response: Although recordkeeping would be wise, the rule does
not require it. Under 5 U.S.C. 601, the term ``recordkeeping
requirement'' is defined as a requirement imposed by an agency on
persons to maintain specified records.
f. Duplication, overlap, or conflict. Several respondents
criticized the statement in the IRFA that the rule does not
duplicate, overlap, or conflict with any other Federal rules. The
respondents state that the IRFA ignores the obvious
interrelationship with the Federal False Claims Act and its qui tam
provisions and it did not address the inconsistency between the
proposed rule and the Federal Sentencing Guidelines. The rule is
inconsistent with a voluntary disclosure being a mitigation
consideration in the FAR debarment and suspension proceedings and
under the False Claims Act because disclosure would be mandatory
rather than voluntary.
Response: Under 5 U.S.C. 601, ``rule'' is defined as meaning any
rule for which the agency publishes a general notice of proposed
rulemaking pursuant to section 553(b) of this title. Codified laws
are not a rule. The Sentencing Guidelines are, strictly speaking,
also not a rule. However, the Councils disagree that this rule is
duplicative of the False Claims Act and any inadvertent
inconsistency with the Guidelines has been considered in formulating
this final rule. The FAR, the U.S. Sentencing Guidelines, and the
civil False Claims Act consider any self-disclosure to constitute a
mitigating circumstance, whether voluntary or mandatory.
3. Description and estimate of the number of small entities to
which the rule will apply.
The rule imposes a clause in contracts that exceed $5 million
and a performance period greater than 120 days. Based on FY 2006
data collected from the Federal Procurement Data System, the
Councils estimate that this clause will apply to 2700 prime
contractors per year, of which 1050 companies are small business
concerns.
The clause also flows down to subcontracts that exceed $5
million, and we estimate that approximately 1050 additional small
business concerns will meet these conditions. We calculate the
number of small business concerns that will be required by the
clause to report violations of Federal criminal law with regard to a
Government contract or subcontracts as follows:
1050 prime contractors + 1050 subcontractors = 2100 x 4% = 84.
In addition, although there is no clause required, all
contractors will be on notice that they may be suspended or debarred
for failure to report known violations of Federal criminal law with
regard to a Government contract or subcontract. In FY 2006 there
were 144,854 small business concerns listed in FPDS-NG with unique
DUNS numbers. We estimate that of the listed small business
concerns, approximately 116,000 (80%) will receive contracts in a
given fiscal year. Government small business experts guess that at
least twice that number of small businesses (232,000) will receive
subcontracts. However, the only small business concerns impacted by
this cause for suspension or debarment are those that are aware of
violation of Federal criminal law with regard to their Government
contracts or subcontracts. Subtracting out those contracts and
subcontracts covered by the clause (1050 each), we estimate this
number as follows: (114,950 + 230,950 = 345,900 x 1% = 3,459). We
estimate a lower percentage than used for contracts and subcontracts
that contain the clause, because these are lower dollar contracts
and subcontracts, including commercial contracts, and there may be
less visibility into violations of Federal criminal law. Because
there is no contract clause, we estimate that only 1% of those
contractors/subcontractors that are aware of a violation of Federal
criminal law in regard to the contract or subcontract will
voluntarily report such violation to the contracting officer (3459 x
1% = 34). The estimated number of small businesses in the FRFA (119)
has increased from the IRFA (45) because of the applicability of the
clause to commercial contracts and contracts to be performed outside
the United States and because the disclosure requirement now applies
to violations of the civil False Claims Act as well as violations of
Federal criminal law.
4. Description of projected reporting, recordkeeping, and other
compliance requirements of the rule, including an estimate of the
classes of small entities which will be subject to the requirement
and the type of professional skills necessary for preparation of the
report or record.
The rule requires contractors to report to the agency office of
the inspector general, with a copy to the contracting officer,
violations of Federal criminal law in connection with the award or
performance of any Government contract or subcontract for contracts
that exceed $5 million with a contract performance period greater
than 120 days, and the same criteria for flow down to subcontracts.
Such a report would probably be prepared by company management, and
would probably involve legal assistance to prepare and careful
review at several levels. There are no recordkeeping requirements in
the rule.
5. Description of the steps the agency has taken to minimize the
significant economic impact on small entities consistent with the
state objectives of applicable statute, including a statement of the
factual, policy, and legal reasons for selecting the alternative
adopted in the final rule and why each one of the other significant
alternatives to the rule considered by the agency which affect the
impact on small entities was rejected.
The Councils adopted the following alternatives in order to
minimize the impact on small business concerns:
The final rule requires small businesses to ``make a
copy of the code available'' to each employee (rather than ``provide
a copy''). The Councils rejected the addition of a requirement that
small businesses must specifically make each employee aware of the
duties and obligations under the code.
The requirement for formal training programs and
internal control systems is inapplicable to small business concerns.
Large businesses are still required to have an ongoing business
ethics and conduct awareness and compliance program
Disclosure of violations of criminal law is limited to
violations of Federal criminal law involving fraud, conflict of
interest, bribery, or gratuity violations found in 18 U.S.C., rather
than any violation of criminal law.
The violations that must be disclosed do not include
violations under the contracts of other contractors.
The period of occurrence of violations that must be
disclosed is limited to 3 years after contract closeout, rather than
extending indefinitely.
The Councils could not exclude small businesses that provide
commercial items, because Pub. L. 110-252 requires application to
contracts for the acquisition of commercial items.
The Councils decided to require disclosure of violations of
civil False Claims Act (from both large and small businesses), as
requested by the Department of Justice,
[[Page 67090]]
because to achieve the objectives of this rule, it is crucial to
deal with responsible contractors, whether large or small. It is not
necessarily evident at the beginning of an investigation whether an
incident is simply an overpayment, a civil false claim, or a
criminal violation. There is no rational reason to exclude civil
false claims from the mandatory disclosure requirement.
Interested parties may obtain a copy of the FRFA from the FAR
Secretariat. The FAR Secretariat has submitted a copy of the FRFA to
the Chief Counsel for Advocacy of the Small Business Administration.
D. Paperwork Reduction Act
The Paperwork Reduction Act (44 U.S.C. Chapter 35) applies because
the final rule contains an information collection requirement (ICR).
The clause at 52.203-13 requires the Contractor to disclose ``credible
evidence of a violation'' of Federal criminal law or a violation of the
False Claims Act, involving fraud, conflict of interest, bribery, or
gratuity violations found in Title 18 of the United States Code. We
received one comment from the public on this disclosure requirement.
Based on the comment that the Government's estimated burden of 3 hours
per response was inadequate, the Councils have revised the estimated
burden hours to 60 hours per response. This change particularly
considers the hours that would be required for review of the collection
within a company, prior to release to the Government. Based on the
revised estimated burden of 60 hours per response, the annual reporting
burden is revised as follows:
Respondents:............................................ 284
Responses per respondent: x 1
---------------
Total annual responses:................................. 284
Preparation hours per response:......................... x 60
---------------
Total response burden hours:............................ 17,040
Averages wages ($75 + 32.85% OH):....................... x $100
---------------
Estimated cost to the Public:........................... $1,704,000
Accordingly, the FAR Secretariat has forwarded a request for
approval of a new information collection requirement concerning 9000-
00XX to the Office of Management and Budget under 44 U.S.C. 3501, et
seq.
List of Subjects in 48 CFR Parts 2, 3, 9, 42 and 52
Government procurement.
Al Matera,
Director, Office of Acquisition Policy.
0
Therefore, DoD, GSA, and NASA amend 48 CFR parts 2, 3, 9, 42 and 52 as
set forth below:
0
1. The authority citation for 48 CFR parts 2, 3, 9, 42 and 52 continues
to read as follows:
Authority: 40 U.S.C. 121(c); 10 U.S.C. chapter 137; and 42
U.S.C. 2473(c).
PART 2--DEFINITIONS OF WORDS AND TERMS
0
2. Amend section 2.101 in paragraph (b)(2) by adding, in alphabetical
order, the definition ``Principal'' to read as follows:
2.101 Definitions.
* * * * *
(b) * * *
(2) * * *
Principal means 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).
* * * * *
PART 3--IMPROPER BUSINESS PRACTICES AND PERSONAL CONFLICTS OF
INTEREST
0
3. Revise section 3.1001 to read as follows:
3.1001 Definitions.
As used in this subpart--
Subcontract means any contract entered into by a subcontractor to
furnish supplies or services for performance of a prime contract or a
subcontract.
Subcontractor means any supplier, distributor, vendor, or firm that
furnished supplies or services to or for a prime contractor or another
subcontractor.
United States means the 50 States, the District of Columbia, and
outlying areas.
0
4. Amend section 3.1003 by revising the section heading and paragraph
(a); redesignating paragraph (b) as paragraph (c), and adding a new
paragraph (b) to read as follows:
3.1003 Requirements.
(a) Contractor requirements. (1) Although the policy at 3.1002
applies as guidance to all Government contractors, the contractual
requirements set forth in the clauses at 52.203-13, Contractor Code of
Business Ethics and Conduct, and 52.203-14, Display of Hotline
Poster(s), are mandatory if the contracts meet the conditions specified
in the clause prescriptions at 3.1004.
(2) Whether or not the clause at 52.203-13 is applicable, 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)).
(3) The Payment clauses at FAR 52.212-4(i)(5), 52.232-25(d),
52.232-26(c), and 52.232-27(l) require that, if the contractor becomes
aware that the Government has overpaid on a contract financing or
invoice payment, the contractor shall remit the overpayment amount to
the Government. A contractor may be suspended and/or debarred for
knowing failure by a principal to timely disclose credible evidence of
a significant overpayment, other than overpayments resulting from
contract financing payments as defined in 32.001 (see 9.406-2(b)(1)(vi)
and 9.407-2(a)(8)).
(b) Notification of possible contractor violation. If the
contracting officer is notified of possible contractor violation of
Federal criminal law involving fraud, conflict of interest, bribery, or
gratuity violations found in Title 18 U.S.C.; or a violation of the
civil False Claims Act, the contracting officer shall--
(1) Coordinate the matter with the agency Office of the Inspector
General; or
(2) Take action in accordance with agency procedures.
* * * * *
0
5. Amend section 3.1004 by removing the introductory text and revising
the introductory text of paragraph (b)(1) to read as follows:
3.1004 Contract clauses.
* * * * *
(b)(1) Unless the contract is for the acquisition of a commercial
item or will be performed entirely outside the United States, insert
the clause at FAR
[[Page 67091]]
52.203-14, Display of Hotline Poster(s), if--
* * * * *
PART 9--CONTRACTOR QUALIFICATIONS
0
6. Amend section 9.104-1 by revising paragraph (d) to read as follows:
9.104-1 General standards.
* * * * *
(d) Have a satisfactory record of integrity and business ethics
(for example, see Subpart 42.15).
* * * * *
0
7. Amend section 9.406-2 by revising the introductory text of paragraph
(b)(1) and adding paragraph (b)(1)(vi) to read as follows:
9.406-2 Causes for debarment.
(b)(1) A contractor, based upon a preponderance of the evidence,
for any of the following--
* * * * *
(vi) Knowing failure by a principal, until 3 years after final
payment on any Government contract awarded to the contractor, to timely
disclose to the Government, in connection with the award, performance,
or closeout of the contract or a subcontract 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;
(B) Violation of the civil False Claims Act (31 U.S.C. 3729-3733);
or
(C) Significant overpayment(s) on the contract, other than
overpayments resulting from contract financing payments as defined in
32.001.
* * * * *
0
8. Revise section 9.407-2 by redesignating paragraph (a)(8) as
paragraph (a)(9) and adding a new paragraph (a)(8); to read as follows:
9.407-2 Causes for suspension.
(a) * * *
(8) Knowing failure by a principal, until 3 years after final
payment on any Government contract awarded to the contractor, to timely
disclose to the Government, in connection with the award, performance,
or closeout of the contract or a subcontract thereunder, credible
evidence of--
(i) Violation of Federal criminal law involving fraud, conflict of
interest, bribery, or gratuity violations found in Title 18 of the
United States Code;
(ii) Violation of the civil False Claims Act (31 U.S.C. 3729-3733);
or
(iii) Significant overpayment(s) on the contract, other than
overpayments resulting from contract financing payments as defined in
32.001; or
* * * * *
PART 42--CONTRACT ADMINISTRATION AND AUDIT SERVICES
0
9. Amend section 42.1501 by revising the last sentence to read as
follows:
42.1501 General.
* * * It includes, for example, the contractor's record of
conforming to contract requirements and to standards of good
workmanship; the contractor's record of forecasting and controlling
costs; the contractor's adherence to contract schedules, including the
administrative aspects of performance; the contractor's history of
reasonable and cooperative behavior and commitment to customer
satisfaction; the contractor's record of integrity and business ethics,
and generally, the contractor's business-like concern for the interest
of the customer.
PART 52--SOLICITATION PROVISIONS AND CONTRACT CLAUSES
0
10. Amend section 52.203-13 by--
0
a. Revising the date of clause;
0
b. Revising paragraph (a);
0
c. Revising paragraphs (b)(1)(i), (b)(1)(ii), (b)(2) and adding
paragraph (b)(3); and
0
d. Revising paragraphs (c) and (d).
The revised text reads as follows:
52.203-13 Contractor Code of Business Ethics and Conduct.
* * * * *
Contractor Code of Business Ethics and Conduct
(Dec 2008)
(a) Definitions. As used in this clause--
Agent means any individual, including a director, an officer, an
employee, or an independent Contractor, authorized to act on behalf
of the organization.
Full cooperation--(1) Means disclosure to the Government of the
information sufficient for law enforcement to identify the nature
and extent of the offense and the individuals responsible for the
conduct. It includes providing timely and complete response to
Government auditors' and investigators' request for documents and
access to employees with information;
(2) Does not foreclose any Contractor rights arising in law, the
FAR, or the terms of the contract. It does not require--
(i) A Contractor to waive its attorney-client privilege or the
protections afforded by the attorney work product doctrine; or
(ii) Any officer, director, owner, or employee of the
Contractor, including a sole proprietor, to waive his or her
attorney client privilege or Fifth Amendment rights; and
(3) Does not restrict a Contractor from--
(i) Conducting an internal investigation; or
(ii) Defending a proceeding or dispute arising under the
contract or related to a potential or disclosed violation.
Principal means 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).
Subcontract means any contract entered into by a subcontractor
to furnish supplies or services for performance of a prime contract
or a subcontract.
Subcontractor means any supplier, distributor, vendor, or firm
that furnished supplies or services to or for a prime contractor or
another subcontractor.
United States means the 50 States, the District of Columbia, and
outlying areas.
(b) * * *
(1) * * *
(i) Have a written code of business ethics and conduct;
(ii) Make a copy of the code available to each employee engaged
in performance of the contract.
(2) The Contractor shall--
(i) Exercise due diligence to prevent and detect criminal
conduct; and
(ii) Otherwise promote an organizational culture that encourages
ethical conduct and a commitment to compliance with the law.
(3)(i) The Contractor shall timely disclose, in writing, to the
agency Office of the Inspector General (OIG), with a copy to the
Contracting Officer, whenever, in connection with the award,
performance, or closeout of this contract or any subcontract
thereunder, the Contractor has credible evidence that a principal,
employee, agent, or subcontractor of the Contractor has committed--
(A) 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
(B) A violation of the civil False Claims Act (31 U.S.C. 3729-
3733).
(ii) The Government, to the extent permitted by law and
regulation, will safeguard and treat information obtained pursuant
to the Contractor's disclosure as confidential where the information
has been marked ``confidential'' or ``proprietary'' by the company.
To the extent permitted by law and regulation, such information will
not be released by the Government to the public pursuant to a
Freedom of Information Act request, 5 U.S.C. Section 552, without
prior notification to the Contractor. The Government may transfer
documents provided by the Contractor to any department or agency
within the Executive Branch if the information relates to matters
within the organization's jurisdiction.
(iii) If the violation relates to an order against a
Governmentwide acquisition contract, a multi-agency contract, a
multiple-award schedule contract such as the Federal Supply
Schedule, or any other procurement instrument intended for use by
multiple agencies, the Contractor shall notify the OIG of the
ordering agency and the IG of the agency responsible for the basic
contract.
(c) Business ethics awareness and compliance program and
internal control
[[Page 67092]]
system. This paragraph (c) does not apply if the Contractor has
represented itself as a small business concern pursuant to the award
of this contract or if this contract is for the acquisition of a
commercial item as defined at FAR 2.101. The Contractor shall
establish the following within 90 days after contract award, unless
the Contracting Officer establishes a longer time period:
(1) An ongoing business ethics awareness and compliance program.
(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.
(2) An 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.
(ii) At a minimum, the Contractor's internal control system
shall provide for the following:
(A) Assignment of responsibility at a sufficiently high level
and adequate resources to ensure effectiveness of the business
ethics awareness and compliance program and internal control system.
(B) Reasonable efforts not to include an individual as a
principal, whom due diligence would have exposed as having engaged
in conduct that is in conflict with the Contractor's code of
business ethics and conduct.
(C) Periodic reviews of company business practices, procedures,
policies, and internal controls for compliance with the Contractor's
code of business ethics and conduct and the special requirements of
Government contracting, including--
(1) Monitoring and auditing to detect criminal conduct;
(2) Periodic evaluation of the effectiveness of the business
ethics awareness and compliance program and internal control system,
especially if criminal conduct has been detected; and
(3) Periodic assessment of the risk of criminal conduct, with
appropriate steps to design, implement, or modify the business
ethics awareness and compliance program and the internal control
system as necessary to reduce the risk of criminal conduct
identified through this process.
(D) An internal reporting mechanism, such as a hotline, which
allows for anonymity or confidentiality, by which employees may
report suspected instances of improper conduct, and instructions
that encourage employees to make such reports.
(E) Disciplinary action for improper conduct or for failing to
take reasonable steps to prevent or detect improper conduct.
(F) Timely disclosure, in writing, to the agency OIG, with a
copy to the Contracting Officer, whenever, in connection with the
award, performance, or closeout of any Government contract performed
by the Contractor or a subcontractor thereunder, the Contractor has
credible evidence that a principal, employee, agent, or
subcontractor of the Contractor has committed a violation of Federal
criminal law involving fraud, conflict of interest, bribery, or
gratuity violations found in Title 18 U.S.C. or a violation of the
civil False Claims Act (31 U.S.C. 3729-3733).
(1) If a violation relates to more than one Government contract,
the Contractor may make the disclosure to the agency OIG and
Contracting Officer responsible for the largest dollar value
contract impacted by the violation.
(2) If the violation relates to an order against a
Governmentwide acquisition contract, a multi-agency contract, a
multiple-award schedule contract such as the Federal Supply
Schedule, or any other procurement instrument intended for use by
multiple agencies, the contractor shall notify the OIG of the
ordering agency and the IG of the agency responsible for the basic
contract, and the respective agencies' contracting officers.
(3) The disclosure requirement for an individual contract
continues until at least 3 years after final payment on the
contract.
(4) The Government will safeguard such disclosures in accordance
with paragraph (b)(3)(ii) of this clause.
(G) Full cooperation with any Government agencies responsible
for audits, investigations, or corrective actions.
(d) Subcontracts. (1) The Contractor shall include the substance
of this clause, including this paragraph (d), in subcontracts that
have a value in excess of $5,000,000 and a performance period of
more than 120 days.
(2) In altering this clause to identify the appropriate parties,
all disclosures of violation of the civil False Claims Act or of
Federal criminal law shall be directed to the agency Office of the
Inspector General, with a copy to the Contracting Officer.
(End of clause)
0
11. Amend section 52.209-5 by revising the date of clause; and
paragraph (a)(2) to read as follows:
52.209-5 Certification Regarding Responsibility Matters.
* * * * *
Certification Regarding Responsibility Matters
(Dec 2008)
* * * * *
(a) * * *
(2) Principal, for the purposes of this certification, means 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).
* * * * *
0
12. Amend section 52.212-5 by--
0
a. Revising the date of the clause;
0
b. Redesignating paragraphs (b)(2) through (b)(40) as (b)(3) through
(b)(41), respectively, and adding a new paragraph (b)(2);
0
c. Removing from paragraph (e)(1) ``paragraphs (i) through (vii)'' and
adding ``paragraphs (e)(1)(i) through (xi)'' in its place; and.
0
d. Redesignating paragraphs (e)(1)(i) through (e)(1)(x) as paragraphs
(e)(1)(ii) through (e)(1)(xi), respectively, and adding a new paragraph
(e)(1)(i).
The added and revised text reads as follows:
52.212-5 Contract Terms and Conditions Required To Implement Statutes
or Executive Orders--Commercial Items.
* * * * *
Contract Terms and Conditions Required To Implement Statutes or
Executive Orders--Commercial Items
(Dec 2008)
* * * * *
(b) * * *
(2) 52.203-13, Contractor Code of Business Ethics and Conduct
(DEC 2008)(Pub. L. 110-252, Title VI, Chapter 1 (41 U.S.C. 251
note)).
* * * * *
(e) * * *
(1) * * *
(i) 52.203-13, Contractor Code of Business Ethics and Conduct
(DEC 2008) (Pub. L. 110-252, Title VI, Chapter 1 (41 U.S.C. 251
note)).
* * * * *
52.213-4 [Amended]
0
13. Amend section 52.213-4 by--
0
a. Revising the date of the clause to read (DEC 2008); and
0
b. Removing from paragraph (a)(2)(vi) ``(MAR 2007)'' and adding ``(DEC
2008)'' in its place.
0
14. Amend section 52.244-6 by--
0
a. Revising the date of the clause;
0
b. Redesignating paragraphs (c)(1)(i) through (c)(1)(vi) as paragraphs
(c)(1)(ii) through (c)(1)(vii), respectively, and adding a new
paragraph (c)(1)(i).
The added and revised text reads as follows:
52.244-6 Subcontracts for Commercial Items.
* * * * *
Subcontracts for Commercial Items
(Dec 2008)
* * * * *
(c)(1) * * *
[[Page 67093]]
(i) 52.203-13, Contractor Code of Business Ethics and Conduct
(DEC 2008) (Pub. L. 110-252, Title VI, Chapter 1 (41 U.S.C. 251
note).
* * * * *
[FR Doc. E8-26953 Filed 11-10-08; 8:45 am]
BILLING CODE 6820-EP-P