Reproduced with permission from Federal Contracts Report, Vol. 90 (Dec. 9, 2008) p. 443.

Copyright 2008 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>

INFORMATION CONCERNING THE NEW MANDATORY DISCLOSURE RULES The new FAR mandatory disclosure/ethics and compliance rule goes into effect December 12, 2008, ushering in a new paradigm for the public-private relationship that government contractors enjoy with their federal customers. (FAR Case 2007-006, Contractor Business Ethics Compliance Program and Disclosure Requirements, can be found at 73 Fed. Reg. 67,064 (Nov. 12, 2008).) As government regulators and law enforcement officials assume a more prominent role in contract administration through expanded oversight, questions abound as to how those officials will implement the new rule and discharge their duties in light of the mandatory disclosure requirements. Recent industry outreach meetings with government officials who either helped write the new rule or will be responsible for implementing it have yet to provide consistent guidance on how contractors should expect the rule to be enforced. Consistent guidance or no, the fact remains that as Dec. 12 approaches, all government contractors must take appropriate steps to place themselves in a position to comply with the new requirements on day one. Given the present uncertainty about exactly how the various agency inspectors general and suspension /debarment officials will pursue their new authorities, caution is the word of the day for contractors, that will be best served to err on the side of conservative interpretations of their new obligations. As the new requirements roll out in near real-time, contractors must focus on two primary compliance objectives: (1) satisfying new mandatory disclosure requirements, including possible “catchup” reporting obligations; and (2) establishing effective internal control processes to promote prospective compliance. Several considerations for each objective are discussed below. Preparing for Mandatory Disclosure Because the new FAR rule demands disclosures of violations or overpayments related to current contracts, or prior contracts for which “final payment” was received within the last three years, the first step for each contractor should be to compile an inventory of all past and current contracts that fall within the reporting scope. This will provide the contractor with an essential baseline for reporting obligations, as well as guide the contractor in its “look back” process to determine whether past events require disclosure. Similarly, in light of the three-year look-back period, final payment now has new significance, and contractors should diligently pursue final payment and contract closeout promptly once contract performance ends. Delaying that process may subject a contractor to a longer-than-necessary disclosure period. Because a contractor's reporting obligation is triggered by the knowledge of “principals,” the contractor must take appropriate steps to identify who could be deemed a principal. The final rule defines principal to mean “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).” The preamble to the rule indicates that principal should be construed broadly, and may include compliance officers or directors of internal audits, as well as other positions of responsibility. After identifying these individuals, the contractor should consider providing them a written explanation of the new disclosure obligations and the

FAR clause 52. A key to any such procedures. In smaller companies. that person could also handle this task. may be centralization. In addition to beating the bushes for prior undisclosed violations or overpayments. For contractors with “covered” contracts in excess of $5 million and 120 days.203-13 specifically requires disclosures related to a covered contract to be made to the proper inspector general (with a copy to the contracting officer). depending on the size and culture of the contractor. Channeling internal reporting of possible violations to a central person or office with responsibility for coordinating investigations and disclosures may reduce the risk that known violations go unreported and ensure consistency in approach. such statements by principals may not be necessary. Likewise. going forward the implementation of such controls and mechanisms may obviate the need for such statements. one of the challenges that contractors are likely to face is ensuring that employees and principals are trained to report possible violations through the proper channels to ensure that consistent procedures and evaluation criteria are applied. each contractor should also review its history of any disclosures it may already have made to the government on contracts within the reportable time frame. a signed statement that they are aware of none. In addition to consolidating the decisionmaking process. Thus.e. and assess possible violations from a wide variety of sources to determine whether there is credible evidence triggering a reporting obligation. like the cognizant contracting officer.203-13(c) (i. designating a central data gathering point. investigate. Similar ongoing periodic statements by principals also will assist the contractor in prospective compliance. where possible and if necessary. alternatively.203-13 may impose an obligation to “refresh” previous disclosures to the cognizant agency inspector general. FAR clause 52. centralization could help ensure that a contractor consistently follows best practices for conducting and documenting . Not only may these individuals be illequipped to determine on their own whether there is credible evidence of a violation. it appears that every disclosure may need to be made to the appropriate inspector general. Contractors also will require adequate internal procedures to capture. Such centralized coordination may be especially difficult for large companies or those with a diverse management structure (such as consulting firms with a partnership-like structure). and having each principal provide any information regarding potential violations or overpayments or. process. this role could be fulfilled by another corporate officer who performs multiple roles. but they may also be unlikely to employ reliable procedures to make such a determination. For contractors that already have had in place during the look-back period robust internal controls and investigating/reporting mechanisms. if the disclosure was previously made to another government official. for contractors required to maintain internal controls under FAR 52. For companies that already have a dedicated compliance officer.scope of activities that trigger them. One option is for contractors to designate a senior officer of the company as the internal point of contact with responsibility for coordinating and overseeing internal investigations and disclosure decision-making processes. A thorough catalogue of prior disclosures can prepare a contractor to make single omnibus “refresher” disclosures to a cognizant inspector general. but it may help prevent possible violations known only to dispersed “principals” from going unreported and will ensure consistency in investigations and disclosure practices. all companies with covered contracts except small businesses and commercial item contractors). Thus.

Contractors will likely benefit from the early involvement of in-house or outside legal counsel in these internal investigation and deliberation processes. This could place a contractor that decides not to disclose a potential violation in a vulnerable position where it must justify or defend its decision not to report on the grounds that the contractor did not believe the results of its investigation constituted credible evidence. not what a prosecutor or relator might deem to be credible evidence. to the fullest extent possible. A contractor should ensure that any written disclosure bears proper restrictive legends that prevent public dissemination of the submissions under the Freedom of Information Act. Although the facts uncovered by any attorney-driven investigation are not privileged.g. however.”). Thorough. rather than filling out the fields in the electronic form. See. If not. at least initially until the scope of the new requirements becomes better understood through experience. there is a risk that a contractor may deem evidence not sufficiently “credible” to merit mandatory disclosure. Nevertheless.gsa. all documentation prepared in connection with investigations and credible evidence determinations should be prepared with an eye toward possible subsequent disclosure. Nevertheless. contractors should err on the side of caution and when in doubt consider disclosure. attorney-client communications and attorney work-product privileges are preserved notwithstanding the mandatory disclosure and “full cooperation” requirements in FAR 52. if this option is available. General Services Administration. only to have that determination called into question in a later suspension/debarment proceeding. See FAR 9. Inspectors general of the National Aeronautics and Space Administration. e. contemporaneous documentation of a contractor's internal investigations and credible evidence determinations could provide necessary justification of the adequacy and reasonableness of the contractor's process and decision-making in the glow of hindsight. Accordingly. It remains to be seen how effective the agencies' electronic forms will be from a practical perspective. and Defense Department are trying to implement standard electronic forms for disclosures via the internet.gov/integritycover. Some agency electronic forms (including GSA's) may permit a disclosure to be made with an attached electronic file. contractors should recognize the ambiguity surrounding the credible evidence standard. . and the mandatory reporting obligation is triggered by what the contractor reasonably deems to be credible evidence. contractors may elect to make the written disclosure in a separate electronic document and upload that document. particularly if there is subsequent qui tam activity or other criminal prosecution or civil litigation. http://oig. contractors may wish to consider establishing policies to document their disclosure or non-disclosure determinations. as well as tension between it and the “adequate evidence” standard that suspension officials rely on to determine whether there is sufficient need to suspend a contractor. One interpretation of the rule is that “credible evidence” is to be determined from the contractor's perspective. rather than through the designated electronic forms available on the internet.internal investigations and credible evidence determinations.htm. the contractor may want to consider providing any disclosure to the inspector general in hard copy. Ultimately. Whether counsel is involved the process or not.203-13(c).407-1(b)(1) (“Suspension is a serious action to be imposed on the basis of adequate evidence … .. this will provide the contractor some measure of control over the content and distribution of the information in its disclosure. Given the ambiguous “credible evidence” reporting standard.

• Selecting Subcontractors: It is also worth noting that the preamble to the FAR rule observes that the “same reasonable efforts that the contractor may take to exclude…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. and internally available. contractors should prepare an overlay of their existing procedures versus the new minimum requirements to identify shortfalls. Internal Control Requirements FAR 52. or areas for control improvements. new requirements. but must verify that existing mechanisms are consistent with the new rule and that those internal controls are sufficiently formal. Reg 67. documented.” . Contractors may also consider whether to include standard terms in subcontracts that permit a prime contractor to conduct investigations involving subcontractor personnel and/or records.Finally.” 73 Fed. Furthermore.” Contractors therefore should have controls in place to verify whether a subcontractor has a training program and provide subcontractor training if necessary. Thus. they should recognize that cooperation in prime contractor investigations will diminish the need for a prime contractor to make a defensive. and this provision will be required for all covered solicitations and contracts (with subcontract flow down as appropriate) issued on or after Dec. Many contractors subject to this requirement likely already have existing internal control mechanisms in place. • Training Subcontractors: FAR 52. 12.804. contractors should revisit model subcontract or teaming agreements they use to ensure incorporation of flow-down requirements and that necessary disclosures can be made without violating nondisclosure obligations with these business partners. Contractors should consider implementing new human resources policies/procedures to conduct adequate background checks to vet current and prospective principals in conjunction with hiring and promotions. prophylactic disclosure if it suspects subcontractor wrongdoing but is unable to effectively investigate or determine whether credible evidence exists.203-13(c)(1)(ii) requires the contractor to provide training to subcontractors and agents “as appropriate. Two new minimum control requirements.203-13(c)(2)(G) “full cooperation” provision.203-13(c)(2)(ii)(B) requires a contractor to take reasonable steps not to include as a principal any person who due diligence would have exposed as having engaged in conduct that conflicts with the contractor's code of business ethics and conduct. it may also be prudent for contractors to have documented procedures established for assessing potential subcontractors as team members in this regard.203-13(c) imposes new mandatory minimum internal control requirements for contractors with a covered contract (small business and commercial item contractors excepted). are not likely to be part of existing procedures and should be specifically addressed: • Excluding Certain Principals: FAR 52. This may also require revision of standard subcontract terms and conditions to include training components “as appropriate. To this end. in particular. While subcontractors likely would push back against a clause that echoes the FAR 52. since mandatory disclosure requirements may extend to subcontractors or teaming partners. contractors should maintain robust personnel files that document any employee violations of the company's code of business ethics and conduct to ensure employees considered for promotion to a “principal” position are qualified under this new standard.

The regulations themselves have acknowledged that “there is no doubt mandatory disclosure is a ‘sea change’ and a ‘major departure’” from the status quo. such internal controls will provide effective tools for identifying potential violations/overpayments subject to mandatory disclosure requirements. Conclusion Under the new rule.e. or “significant overpayments” for all current or prior contracts for which the contractor has received final payment within the last three years. . At a minimum. can be profound. suspension/debarment. Furthermore. 12. 2008: (1) all contractors will become subject to the new requirement for timely disclosure to the government where a principal of the contractor has credible evidence of a violation of the False Claims Act or certain federal criminal laws in connection with a federal contract or subcontract. i.• Small and Commercial Item Contractors: Some small businesses and commercial item contractors with less formalized internal procedures may determine that the new enforcement environment and best business practices make more formal internal control procedures prudent. formal procedures better enable the contractor to explain or defend the reasonableness of any internal investigations/internal decision-making processes in the event the contractor decides not to disclose a possible violation for want of credible evidence but later has that decision challenged.. even though those contractors are not required to maintain them under revised FAR 52. and (2) contractors (other than small businesses or commercial item contractors) with contracts above the $5 million/120 day threshold will start seeing contract and subcontract clauses requiring “internal control” systems with certain minimum features. two things will happen effective Dec.203-13(c). and contractors will be well advised to take these new requirements seriously. as the consequences for non-compliance. to which these contractors are not exempt.

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