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ETHICS, CONTROLS AND DISCLOSURE: EXPLORING THE NEW FINAL RULE

ETHICS, CONTROLS AND DISCLOSURE: EXPLORING THE NEW FINAL RULE. Robert J. Sherry K&L Gates Dallas, TX / San Francisco, CA December 3, 2008. OVERVIEW. Introduction Three Major Components of Revised FAR Coverage Code of Ethics/Conduct Internal Controls Disclosure Obligations

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ETHICS, CONTROLS AND DISCLOSURE: EXPLORING THE NEW FINAL RULE

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  1. ETHICS, CONTROLS AND DISCLOSURE:EXPLORING THE NEW FINAL RULE Robert J. Sherry K&L Gates Dallas, TX / San Francisco, CA December 3, 2008

  2. OVERVIEW • Introduction • Three Major Components of Revised FAR Coverage • Code of Ethics/Conduct • Internal Controls • Disclosure Obligations • Other Features of the Final Rule • Critical Sample Issues • Conclusion

  3. INTRODUCTION • Final Rule: 73 Fed. Reg. 67064 (November 12, 2008) • Effective Date: December 12, 2008 (but see later comments) • Genesis: • 2007 DOJ request to OFPP for additional regulation • “Close the Contractor Fraud Loophole Act” (enacted 2008) • Principal Impacts: • Mandatory internal controls for certain contractors/subcontractors • Disclosure obligations if “credible evidence” exists of certain violations of law • New causes for debarment/suspension relating to failures to disclose

  4. REVISED FAR COVERAGE • Code of Ethics/Conduct • Now required for commercial item contracts/subcontracts (and all other contracts/subcontracts containing FAR 52.203-13) • To be inserted in contracts/subcontracts over $5M, performance period of 120 or more days • Effective 30 days after contract award (unless CO agrees to later date) • Obligations: • Code of Ethics/Conduct • “Make available” to each performing employee • “Due diligence” to prevent/detect criminal conduct • “Promote compliance” with code

  5. REVISED FAR COVERAGE • Internal Controls • Not required for commercial item contracts/subcontracts • Effective 90 days after contract award (unless CO agrees to later date) • Previous regulation: internal control “examples” • Final rule: “Minimum requirements” in 52.203-13 • Ethics awareness/training • High-level oversight/adequate resources • “Reasonable” efforts -- “compliant principals” • Periodic compliance reviews • Anonymous or confidential “hotline” (or similar mechanism) • Disciplinary action for improper conduct • Timely disclosure to IG/CO of specified legal violations • Disclosure obligation lasts until three years after final payment • Cooperation with government reviews

  6. REVISED FAR COVERAGE • Disclosure Obligations • Applies to all contracts/subcontracts for three years after final payment • Two sources: • 52.203-13 • Revised debarment/suspension regulations • What must be disclosed? “Credible evidence” that a principal, employee, agent or subcontractor has committed • Certain criminal violations -- fraud, conflicts of interest, bribery, gratuities • Civil False Claims Act violations • Also must disclose “significant overpayments” (other than contract financing overpayments) • To whom is disclosure made? See FAR 52.203-13: • Agency IG • Copy to CO • If GWAC or similar contract, to “ordering” and “contracting” agency IGs • Some agency IGs are beginning to develop disclosure protocols

  7. OTHER FEATURES OF THE FINAL RULE • FAR modifications • “Integrity and business ethics” now past performance information • Cause for debarment: “knowing failure” by principal to disclose “credible evidence” of violation (preponderance standard) • Cause for suspension: same, but “adequate evidence” standard • Modifications of FAR 52.203-13 clause to reflect changes discussed earlier regarding code, controls, disclosure

  8. SAMPLE CRITICAL ISSUES • Initial thoughts -- more to come/evolve • Commercial item contract status -- another reason to accept only commercial item contracts/subcontracts if feasible • To disclose or not to disclose? • Balancing investigatory conclusion (no violation) vs. more aggressive government view • What is “credible evidence”? • What “overpayments” must be disclosed? • E.g., in GSA contract context, must you disclose potential IFF underpayments/price reduction clause violations? • What will COs do with information? • Increase in nonresponsibility determinations? • Past performance evaluation issues

  9. CONCLUSION • Standards in final rule -- subject to evolving interpretation • Examine existing code of ethics/conduct • Examine internal controls • Examine completed investigations for “open” contracts • Other “open” contract issues?

  10. QUESTIONS? • Bob Sherry (214) 939-4945 (415) 249-1032 robert.sherry@klgates.com

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