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New Ethics & Compliance Rules for Contractors

Posted on May 3, 2009
Kathy AlbaradoWritten by Kathy Albarado | Email author

may-2009

By Seth Berenzweig, Managing Partner, Albo & Oblon, LLP

The government has adopted major changes to rules governing contractor ethics and compliance programs, which modify parts of the Federal Acquisition Regulations (“FAR”). These new rules became effective on December 12, 2008, and contain the most significant changes in the regulatory landscape for contractors in several years. This article provides a brief overview of the changes, and provides guidance on how contractors can adopt training programs and gain a competitive business advantage.

There are four major types of changes to the FAR that require contractor compliance:

  1. Mandatory disclosure – A contractor must disclose procurement fraud and overpayments, or risk debarment or suspension;
  2. Code of Business Ethics and Conduct – A contractor must also have a written Code of Business Ethics and Conduct;
  3. Ethics training – If a contract exceeds $5 million and has a performance period longer than 120 days, then the contractor must have an ongoing ethics and compliance training program, unless the contractor is a small business;
  4. Internal controls – If a contract exceeds $5 million and has a performance period longer than 120 days, then the contractor must also have a system of internal controls to prevent, detect, and remedy procurement fraud, unless the contractor is a small business.

Some of the most controversial changes involve the duty to disclose. It is important to note that the duty to disclose applies to all contractors performing contracts subject to the FAR, including contracts for commercial items and contracts performed outside the United States. Under the new suspension and debarment rules, if a contractor fails to disclose procurement fraud and over payments, then the government can suspend or debar the contractor. This makes it more important than ever to make sure your staff is trained in the basic compliance requirements of government contracting and what rules apply to such conduct.

Specifically, contractors must report fraud, conflict of interest, bribery, and illegal gratuities in connection with the award or performance of a government contract; violations of the civil False Claims Act; and “significant” over payments. There is no bright line defining “significant” over payments. The commentary accompanying the new rule states that the rule is “aimed at the type of overpayment that the contractor knows will result in unjust enrichment, and yet fails to disclose it.” If a contractor has “credible evidence” of a violation, then the contractor must report the violation.

It is essential that companies consider implementing training to educate staff, particularly in view of the new training requirements under the FAR. Unless the company is a small business or handling solely commercial items, if a contract exceeds $5 million and has a performance period longer than 120 days, then the contractor must have an ethics and compliance training program. At a minimum, the training should cover the contractor’s Code of Business Ethics and Conduct, explain the employees’ roles and responsibilities for assuring ethical conduct and compliance with the law, and address the contractor’s system of internal controls, including reporting suspected procurement fraud. The training session can also include a legal component to address the legal mechanics under the FAR and other federal laws.

Adopting new training and implementing internal controls can help companies turn these new requirements into competitive advantages to help reduce costs and improve their organization. Taking advantage of the changes will help you:

  • Bolster your competitive advantage by staying ahead of the competition;
  • Become more marketable to partners to team on more work to grow revenues;
  • Increase your credibility with the individual who is making selection decisions;
  • Improve risk management procedures, which can decrease violations and thus cost; and
  • Enhance the valuation of your company, and therefore provide better returns for owners.

Embracing these new procedures can therefore help companies improve their best practices, and better position companies to obtain new work in the future.

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