This week I am running a five-part podcast series, sponsored by Affiliated Monitors, Inc. (AMI). I am joined by AMI Managing Director Rodney A. Grandon and we consider the responsibility of federal contractors to have a compliance and ethics regime in their organizations. We consider the responsibility of federal contractors to maintain their status as “Responsible Contractors” and explore the benefits of having an effective compliance and business ethics program not only to increase business efficiencies and profitability but prepare you in good stead if the regulators come knocking.

Grandon had a long service in the federal sector, going back about 30 years. He has been a Judge Advocate General and a uniformed attorney in the Army, where he spent time in a procurement role. In 2003, he moved over to the Department of the Air Force and the Office of the General Counsel and spent a number of years on the acquisition side. From there he became more focused on fraud prevention and remedy stamp point moved over to a different division within the General Counsel’s (GCs) office with a clear focus on contracting community. He ended his government service as Deputy General Counsel (DGC) for Contractor Responsibility and conflict Resolution as the Air Force’s Debarring and Suspending Official. With this background, Grandon is uniquely suited to engage with industries to promote contractor responsibility, e.g., encouraging the use of appropriate internal controls, emphasizing the need for robust ethics and compliance programs and advocating continuous efforts to enhance individual integrity.

Grandon believes that federal contractors need to embrace a proactive approach to fostering an effective business ethics and awareness compliance program and robust internal controls to prevent and detect fraud and other misconduct. Too often, contractors are caught unprepared when misconduct is identified, forcing them to make urgent investments in ethics and compliance programs at the same time the federal enforcement community – investigators, the Department of Justice (DOJ) and suspension and debarment officials – are placing their business operations under a microscope.

Grandon emphasized that the government is focused on what it terms “responsible contractors”. While there is no FAR laying out the definition of this term, Grandon noted it has come to have a very broad meaning. First, it addresses performance characteristics that a responsible contractor “should have the ability to perform as it said that it would perform pursuant to its contract.” This includes a contract with goods or services. It is beyond ethics and compliance “as it encompasses the concept that a contractor should have the financial wherewithal to complete the contracted task, the facilities or physical plant to perform the work, accounting systems and purchasing systems that are up to the task, property management systems, and all other such systems should be in place. It also means having a workforce that is capable of performing. Finally, it also includes a workforce that is committed to compliance and promoting all they do with integrity.”

Yet even this last phrase has a more nuanced component. Grandon explained that the notion of a responsible contractor “is not limited to the capability of performing under the contract. It also extends to the how and the what is going on there in terms of ethics.” This would lead an inspector to ask such questions as: “Is the workforce, is the contractor taking appropriate steps to train its workforce into the expectations of the government community and compliance and doing business ethically? Is the contractor, attempting to perform with integrity? Is monitoring the very best it can be to make sure that the workforce doesn’t take shortcuts?” Grandon said the inquiries could drill down to the following level; “If the inspector’s tag used, it really is the inspectors tag and it’s used with integrity. Is quality assurance is done with integrity? Is safety embraced and are safe practices the norm? Are the estimates as accurate as the information available, are they honest and are the company’s submissions to the government for invoices accurate.”

All of this means the notion of responsibility is incredibly broad. Suspension and debarment can arise when there is a need or a concern that these responsibility features are not being upheld by the contractor. From there, the situation could require protection of government’s interest from a contractor who is not “responsible”. Grandon emphasized that the “suspension and debarment remedy, even though it should be a remedy of last resort, it is a remedy that it can be used only to protect the government’s business interest. It has no punitive purpose. It has no purpose other than essentially excluding a contractor from the federal marketplace for a period of time with the hope that that contractor will take appropriate corrective measures before it comes back into the federal marketplace. And if it doesn’t, there’s generally going to be a heightened scrutiny of that contractor.”

Grandon concluded by noting that suspension and debarment is a tool which is used in a very limited fashion. Yet it is draconian in its impact if a contractor is dependent on federal revenues. He noted, “a suspension or a debarment could be the end of that company.” This means there are multiple considerations that go into the use of the sanction. He concluded, “the bottom line is suspension and debarment can be used only to protect the government from non-responsible contractors.”

The heart of the business ethics and compliance program distils to three basic elements:  PREVENT misconduct from occurring. DETECT misconduct when it occurs. CORRECT by taking appropriate steps to remediate the consequences of the discovered misconduct (internally, with customers, and with other stakeholders), to understand the root cause of the misconduct, and, based on the findings of the root cause analysis, to revise policies, practices, and controls to prevent similar acts in the future.

Greater specificity is required for companies with federal contracts over $5.5 million and a performance period of 120 days or more must comply with the requirements of FAR 52.203-13, which requires:

• Appropriate steps to enable all company employees to exercise due diligence to prevent and detect misconduct (e.g., open communications and reporting avenues within the company and an external hotline).
• Communication from company leadership to express its commitment to promoting an organizational culture that encourages ethical conduct and a commitment to compliance with the law.
• Appropriately scaled business ethics awareness and compliance program, which by necessity includes a review of company internal controls to ensure they are mapped soundly to the company’s risks.
• Assignment of responsibility for the program at a sufficiently high level within the company to permit effective operations that will not be shut down or adversely influenced by someone with a higher “status” or title within the company.
• Periodic reviews of the company’s business practices, procedures, policies, internal controls for compliance with the special requirements associated with government contracting.
• Established (and followed) disciplinary consequences, including dismissal, for improper conduct or failure to take reasonable steps to prevent or detect improper conduct.
• Presence of, and compliance with, procedures that require timely disclosure to the government of identified misconduct.

Many of these same considerations are addressed in the US Sentencing Commission Guidelines Manual (Guidelines), offering additional guidance for contractors to consider in developing and maintaining effective ethics and compliance programs. The Guidelines make clear that courts will assess effectiveness, at least for the purposes of federal sentencing, by determining whether an organization’s ethics and compliance program has been “reasonably designed, implemented, and enforced so that the program is generally effective in preventing and detecting criminal conduct.” To do so, the program must achieve two fundamental outcomes: (1) it must require the contractor to exercise due diligence to prevent and detect criminal conduct, and (2) otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.

This is more than simply a paper program; it essentially requires an infrastructure around compliance. This includes a person who is assigned the responsibility for the ethics and compliance program and that individual has to be at a sufficiently high level within the company. The program has to be resourced with an appropriate number of employees competent in ethics and compliance. Grandon concluded, “the ultimate test for an ethics and compliance is the effectiveness of the program.” Here he posed several questions that every compliance professional should ask about its program, “Does it facilitate the prevention of misconduct, the identification of misconduct should it occur and appropriate remedial steps? Does it require periodic reviews of the program, a company, business practices, procedures, policies, operations and so forth? Has it been tested to find out whether the infrastructure, their policies, procedures, and controls are having the intended effect on the workforce? This requires a periodic evaluation of the effectiveness of the program. Is there a hotline or a helpline some type of an anonymous reporting mechanism? Does the workforce must know what the options are for reporting misconduct?” Of course, a company must mandate and engage in timely disclosure of identified misconduct if any is found. This should be coupled with full cooperation of the contractor in any audits, investigations, or corrective action.

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