Haynes and Boone's Newsroom

Ready or Not, Here They Come — The Government’s Game of Hide and Seek is Over
11/25/2008
Paul W. Searles

Before the end of the year, government contractors will no longer have the option of voluntarily reporting potential criminal or civil fraud matters identified through their self-governance efforts. The Government’s game of “hide and seek” is over. Contractors will no longer be able to “hide” behind a voluntary disclosure program. Instead, as a result of the new mandatory disclosure program, contractors will be forced to “seek” out potential misconduct and violations of the law.

On November 12th, the Federal Acquisition Regulation Council issued the long-awaited Federal Acquisition Regulation (“FAR”) provision, known as the “Ethics Compliance Rule.” This provision mandates the disclosure of specific criminal violations, violations of the civil False Claims Act, and significant contract overpayments. The rule applies to contracts and sub contracts whose value is more than $5 million, and where the performance period is 120 days or more.

Government contractors should take note of the following requirements in the Ethics Compliance Rule:

• Mandatory Self-Reporting—Self-reporting to the Government by company executives is mandatory once there is "credible evidence" that the company or one of its employees engaged in certain criminal violations--fraud, conflict of interest, bribery, or gratuities--or civil violations of the False Claims Act
  
  
• Suspension or Debarment—Knowingly failing to report violations under this mandatory rule or failure to report significant contract overpayments is an express ground for suspension or debarment
  
  
• Full Cooperation—Cooperating fully with the Government means that the Government must have sufficient information to identify the nature and extent of the offense and the responsible individuals
  
  
• Internal Controls—Establishing an ongoing business ethics awareness and compliance program and a comprehensive internal control system is required within 90 days of the contract award

Contractors should note that a disclosure must be made “timely” and when there is “credible evidence” of a violation. While “mere suspicions” do not need to be disclosed, it is unclear at what point the Government will determine that “credible evidence” exists. Comments to the FAR provision suggest that a contractor has an opportunity to engage in a preliminary examination of the evidence to determine credibility before disclosure becomes mandatory.

The revised rule becomes effective on December 12, 2008, but its retroactivity is unclear. While mandatory disclosure of criminal and civil violations will apply only to contracts awarded after December 12th, under the suspension and debarment rules the Government will require disclosure of either a violation or a significant contract overpayment, even if discovered only in retrospect.

The days of voluntary compliance are over. Contractors will need to be particularly vigilant as the Government steps up its efforts to stem fraud and abuse.