New Federal Regulation Requires Mandatory Disclosure and Amplified Compliance Programs for Government Contractors

November 13, 2008

A final rule issued on November 12, 2008, amends the Federal Acquisition Regulation ("FAR") to require mandatory disclosure by federal government contractors of certain violations of federal criminal law and the civil False Claims Act.  (Text of final rule available here.)  The new rule also mandates that certain federal government contractors create a business ethics awareness and compliance program, as well as an internal control system.  Federal government contractors that currently have compliance and control systems in place will find it necessary to review and potentially to update their existing programs.  Contractors that violate the disclosure and compliance mandates included in the new rule face possible suspension or debarment.  (For more information on suspension and debarment please click here.)  The new rule becomes effective on December 12, 2008.

The push for a rule imposing additional mandatory reporting requirements for federal government contractors originated with the Criminal Division of the Department of Justice, which has long criticized what it sees as a lack of voluntary disclosure by federal contractors of legal and ethical violations.  In May 2007, the Criminal Division reached out to the FAR Council, proposing that the FAR Council promulgate additional mandatory reporting regulations.  While these regulations were going through the review and public comment process, Congress expressed similar concerns.  On June 30, 2008, Congress passed the Close the Contractor Fraud Loophole Act, which contains provisions requiring the FAR Council to increase its disclosure and compliance requirements.

The new rule significantly alters the playing field for federal government contractors and will likely be accompanied by an increase in suspension and debarment actions.  The most significant new compliance obligation thrust upon federal government contractors is the requirement that contractors timely disclose all violations of criminal law involving fraud, conflict of interest, bribery, and gratuities connected to any aspect of a federal government contract or subcontract.  The new rule also requires the disclosure of violations of the civil False Claims Act and "significant" overpayments on a contract.  A knowing failure by a federal government contractor principal to timely disclose credible evidence of these violations or overpayments may result in suspension or debarment.  Disclosure must be made to the Contracting Officer and the Inspector General of the agency that awarded the contract associated with the violation.  Following disclosure, the contractor must cooperate fully with any resulting government investigation.  These mandatory disclosure and cooperation requirements remain in effect for three years from the final payment under each federal government contract.  Significant questions remain as to how broadly the new disclosure requirements will be interpreted and applied.

The new rule also requires contractors, other than those classified as small business concerns or those solely contracting for commercial items, to implement an on-going business ethics awareness and compliance program and an internal control system.  These compliance and control systems must be reasonably calculated to, among other things, facilitate timely discovery of improper conduct related to a federal government contract and guarantee that effective corrective measures are taken once such conduct has been discovered.  Responsibility for the establishment and continued management of these compliance and control programs must be assigned to a contractor employee at a "sufficiently high level" in the company to ensure the programs’ effectiveness.  The compliance and control programs mandated by the new rule must be in place within ninety (90) days after contract award.

Finally, the new rule extends the requirement for a contractor Code of Business Ethics and Conduct (in addition to the business ethics awareness and compliance program and internal control systems discussed above) to all contracts valued in excess of $5 million and with performance periods longer than 120 days.  This requirement applies to companies that are exempted from the requirement to establish compliance and control programs as a result of their small business size or status as a commercial item contractor.  The Code of Business Ethics and Conduct requirement also applies to companies that perform federal government contracts exclusively outside the United States.

While the full effect of the new rule remains to be seen, it is clear that it signals an attempt to change significantly the relationship between contractors and the Federal Government regarding the disclosure of certain criminal and ethical violations, including violations of the civil False Claims Act, as well as instances of significant overpayment.  Further, the complex requirements included in the new rule for compliance and control programs are likely to present significant business and legal challenges to contractors in the near future.

Gibson, Dunn & Crutcher LLP 

Gibson Dunn & Crutcher’s lawyers are available to assist clients in addressing any questions they may have regarding this issue. Please contact the Gibson Dunn attorney with whom you work, or government contracts partners Joseph D. West (202-955-8658, [email protected]), Karen L. Manos, (202-955-8536, [email protected]), or Diana G. Richard (202-887-3572, [email protected]) or white collar defense and investigations partner F. Joseph Warin (202-887-3609, [email protected]), all in the in the firm’s Washington, D.C. office.

© 2008 Gibson, Dunn & Crutcher LLP

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