Avoid the Quick Fix: Addressing Government Contracting Ethical Breaches That Can Destroy A Business

by Snell & Wilmer

For the last 15 years, the Foreign Corrupt Practices Act (FCPA) has garnered the most “compliance” attention by companies and the media due to the severe penalties associated with the bribing of foreign government officials. With the passage of the U.K. Bribery Act, this concern has extended to the bribing of private individuals to obtain a competitive advantage. In the rush for companies to become compliant with the FCPA and the U.K. Bribery Act, the prohibitions on illegal activities involving relationships with U.S. and other domestic governmental representatives have been sidelined. However, recent cases highlighting bribes, kickbacks, fraud, illegal gratuities and other wrong-doing will require the refocusing of companies’ efforts to have a comprehensive and integrated approach to avoiding illegal and unethical conduct regardless of where the contract is to be performed.

One of the most interesting recent cases has revolved around a U.S. Navy contractor nicknamed “Fat Leonard,” who owned a supply company that operated out of Asia. Primarily, his company would supply U.S. Navy ships in various Asian ports. In U.S. District Court in San Diego, a Naval Criminal Investigative Service agent pled guilty to providing the company advance information on the movement of ships, so that the company could be prepared to be in the best position to be awarded the supply contract task orders. Several Naval officers have also been indicted, and senior officers suspended, for alleged illicit relationships with the company, which included the receiving of money, gifts, Lady Gaga concert tickets and sex.

Other recent cases have involved kickbacks to contracting officers or prime contractors for contract awards and false certifications of small business status to obtain set aside contracts. Such recent trends harken a flashback to the Darleen A. Druyun case involving the U.S. Air Force and the bid to replace the air tanker fleet. At the time, Ms. Druyun was the highest level civilian procurement official in the U.S. Air Force and was reported to rule procurements with an iron fist. Her downfall resulted from not the taking of bribes or gifts, but rather the acceptance of employment positions by her family members and her negotiation of a post-Air Force employment position while she was considering which contractor would be awarded the tanker contract. In addition to Ms. Druyun going to jail, a senior Boeing official was also imprisoned and Boeing was required to pay over $600 million in penalties.

Needless to say, even the suspicion of alleged kickbacks, bribes, illegal gratuities or other unethical conduct can lead to bid protests, False Claims Act violations, qui tam actions by whistleblower employees, termination of lucrative (and now, in many cases, rare) government contracts, suspension or debarment as a government contractor and criminal repercussions.

To avoid even the hint of impropriety, it is important for a company to fully understand the scope of the laws, regulations and contract provisions that apply. For example, the Anti-Kickback Law prohibits payments or gifts in exchange for an award of contracts. The gratuities laws prohibit the giving of gifts to government officials who are involved in the procurement process. The Joint Ethics Regulations prohibits any government employees from accepting gifts over a nominal amount. In addition, the Truth In Negotiations Act requires potential prime contractors and subcontractors to only charge the government the actual costs of an item or service, with a fair mark-up.

If a contractor or subcontractor violates these prohibitions and then submits an invoice to the government, a violation of the False Claims Act may have occurred and the company may face a criminal action by the government, breach of contract claim by the contracting officer, bid protests by competitors, suspension or debarment proceedings by the governmental agency, or a qui tam lawsuit by a private individual who is a “whistleblower.” In recent years, these responsive actions to alleged wrongdoing have increased dramatically—costing companies a significant amount of resources and lost opportunities in having to investigate, respond to and defend against such allegations (many of which turn out to be unfounded).

Once a company is fully aware of the various prohibitions—many of which are not highlighted in a contract award, the company should institute clear policies and procedures to effectuate compliance. The policy should include a clear statement from senior management concerning the importance of compliance and that no retribution will occur to an employee or supplier who notifies management of wrongdoing. Of course, the “no retribution rule” only applies if the employee or supplier was not directly involved and did not know of the wrongdoing when it occurred.

It is incumbent on contractors throughout the various tiers to “flow-down” (1) the various prohibitions and (2) the companies’ policies and procedures to enforce the prohibitions to lower-tiered subcontractors. This “flow-down” may include specific provisions in any sub-contract agreement—no matter how informal (i.e., purchase order)—and references to the companies’ policies and procedures that are easily available, at the minimum, on the contractor’s website.

In addition to providing such notification, the higher-tiered contractor may wish to require certifications and representations from the lower-tiered subcontractors that compliance is occurring. These certifications and representations may include, among others, the collection of data on the lower-tiered contractor, such as small business certification, information regarding previous allegations of wrongdoing, whether the subcontractor has ever been terminated for default or suspended/debarred/excluded.

Before, during and even after contract performance, the company may wish to engage in active training of its employees and lower-tiered contractors concerning compliance with the laws and the implementing policies. To the extent appropriate or available, the company may consider inviting government agencies to perform briefings to explain the laws and expectations from the government’s perspective. Such briefings may instill goodwill between the agency and the company. However, companies should be concerned about any unsolicited government “outreach” requests. In recent years, governmental investigative agencies have used “outreach” activities to uncover information about potential wrongdoing. Therefore, under any internal policy and procedure, a company should consider including guidance that any government “request” for information or to conduct an “outreach” effort should be promptly forwarded to senior management and legal counsel should also be involved in evaluating the request.

Regular audits of activities help ensure compliance is occurring or to initiate necessary changes. Further, if there is any hint of a possible violation, the company should immediately investigate the matter and consider the use of outside legal counsel for such an investigation to (1) ensure impartiality, (2) take advantage of the attorney-client privilege and (3) provide real-time advice on how to respond to alleged wrongdoing. Many companies use non-attorney consultants to perform audits or conduct investigations. Although possibly appropriate under certain circumstances, the consultants’ investigation and any resulting report are then not considered privileged and may be obtained by the government during any governmental investigation or proceeding.

Upon discovery of possible wrongdoing, a voluntary disclosure to the contracting officer and the agency’s Office of Inspector General may be appropriate. The government regularly includes a government ethics clause in contracts, a clause that requires several of the actions referenced in this article and actually mandates reporting of alleged wrongdoing whenever “credible evidence” exists. There are specific reporting procedures depending on the governmental agency at issue. Regardless of the level of “credible evidence,” it may be appropriate to report alleged wrongdoing because the government’s or a whistleblower’s threshold of what constitutes “credible evidence” may be quite low. It is important to get out in front of any wrongdoing and, as applicable, completely cooperate with governmental investigators.

As referenced above, the consequences of even an allegation of wrongdoing are quite severe and can easily lead to the destruction of a company. Although compliance is a “cost” center, there is actually a return on being able to highlight a company’s compliance program in marketing efforts and attracting partners for lucrative projects. Simply, large companies like to work with ethical businesses and avoid the taint of any wrongdoing.

Unfortunately, laws and regulations can be complex. The factual scenarios surrounding alleged wrongdoing are, at times, difficult to uncover. It is also difficult to separate personal relationships or the fear of consequences in performing an internal review to allow impartiality. It is also often difficult to know how to interact with governmental investigators. Companies may wish to consider engaging qualified outside counsel with specific experiences in these matters, to assist in any compliance efforts.

With governmental budgetary constraints only becoming greater and the number of governmental inquiries only increasing, companies should take compliance with the law and contract terms extremely seriously. Companies therefore may wish to avoid the quick fix and instead to diligently work to implementing a compliance program that works and incorporates “best practices” to ensure a competitive advantage in the still lucrative business of government contracting.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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