DoD Seeks Enhanced Authority to Withhold Funds from Contractors

by Saul Ewing Arnstein & Lehr LLP

In Brief

  • The U.S. Department of Defense wants to step up its efforts to fight fraud by lowering the threshold for it to withhold payments to contractors who are suspected of bribery.
  • The proposed changes to federal law underscore the importance of a strong compliance and anti-fraud program for those contractors.

Maintaining a robust compliance program to avoid accusations of bribery is as important as ever for defense contractors as Congress considers granting the U.S. Department of Defense (“DoD”) greater authority to fight contract fraud.

The DoD has asked lawmakers to amend a law that governs its ability to withhold funds from contractors. The proposed changes to 10 U.S.C. § 2207 would give the DoD the authority to withhold contractual payments based on preliminary notice that a contractor improperly bribed or attempted to bribe a U.S. government official.

Current law may provide the DoD with an implied right to withhold funds upon preliminary notice of a bribe, but there is no federal court ruling explicitly confirming the existence of that right, the DoD contended. As such, the DoD pointed out, “the United States could be required to make contractual payments to a malfeasant contractor while the proceeding required by Section 2207 is underway, even if the United States knew that the contractor would immediately disburse all payments received on its government contract, potentially even to employees or owners personally responsible for an illegal gratuity.” If that were the case, the DoD stated, once the procedures established the occurrence of the bribe, there would be no funds left for the DoD to recoup.

Under the DoD’s proposal, contractors will be subject to withholding of funds due to possible bribes at an earlier stage than they currently are. And because the current system leaves open the possibility that the contractor could exhaust all funds before the DoD has the chance to recover them, the new system could result in greater recoveries from contractors.

The proposal also establishes that for the DoD to withhold funds based on the suspicion of a bribe, it must meet the standard of preponderance of the evidence. The DoD pointed out that it already applies this standard in such situations, and that incorporating it into the governing law will result in more consistent application of the law. Contractors also will gain “a clearer understanding of their rights” with this change, the DoD contended. In addition, the proposal establishes that the DoD must provide contractors notice before withholding funds on a contract.

Another change the DoD proposed is to establish a fraud-fighting fund within each military department. Under the proposal, all damages that the DoD collects under the provisions discussed above would be deposited in the fraud-fighting fund of each relevant department.

Currently, when the DoD collects those damages, they are deposited into the U.S. Treasury as “miscellaneous receipts” and are not then available for use by DoD departments until they are appropriated through the legislature.

Under the proposed system, the DoD would retain the funds and use them to strengthen and broaden its efforts to combat government fraud. The DoD proposal does not specify the concrete actions that it would take using the recovered funds, but any further anti-fraud efforts could impact the business of any government contractor.

The DoD made these proposals as part of a slate of requests to Congress in connection with Congress’ consideration of the 2014 National Defense Authorization Act (“NDAA”). The yearly NDAA provides funding for all DoD programs, but is also often used to make changes to DoD’s authority and procedures. The proposed NDAA was approved by the House Armed Services Committee on June 6 without the DoD’s proposed changes regarding contractor fraud, but it must still be passed by the full House of Representatives, and the Senate must consider and approve it as well. That process is expected to take months, and the DoD’s proposal may still be added to the legislation as lawmakers continue to work with it.

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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