Self-Disclosure Rules Create Ambiguities 

6  2,008 

By L. James D’Agostino and Emily C. Parker 

The Department of Justice requested the rule, claiming it was necessary because “few companies” have participated in the Defense Department’s voluntary disclosure program. Justice’s request failed to explain why voluntary disclosures were infrequent, or any reason not to conclude that fewer violations were occurring or that contractors were informally resolving violations with contracting officers.

The proposed rule requires contractors to report violations of federal criminal law by any of its principals, employees, agents, or subcontractors relating to any government contract award or performance. They must also provide “full cooperation with any government agencies responsible for audit, investigation, or corrective actions.” It also sets as grounds for suspension or debarment a contractor’s “knowing failure to timely disclose” a violation of criminal law connected to a government contract or a contract overpayment.

This proposed rule appears to exempt from the self-reporting requirements commercial items, contracts performed entirely outside the United States, and contracts worth under $5 million with a performance period under 120 days. However, these exemptions are excluded from the suspension and debarment provisions, raising questions as to the practical effect of their exclusion.

The House Committee on Oversight and Government Reform has objected to the exemptions for contracts performed overseas and for commercial items, although such exemptions are common to the regulation. Committee leaders have issued letters to executive agencies inquiring as to “why and how such a policy was developed,” and sought documents pertaining to these exemptions.

The “overseas loophole” has fueled controversy along with the “Close the Contractor Fraud Loophole Act” sponsored by Rep. Peter Welch, D-Vt. Conversely, many associations, including the Council of Defense and Space Industries Associations (CODSIA), and individual government contractors have submitted comments strongly opposing this mandatory disclosure rule.

Regardless of the exemptions, if the proposed rule becomes final, the ramifications for government contractors are considerable. Requiring self-disclosure along with full cooperation with government audits and investigation threatens longstanding attorney-client relationships, compelling contractors to produce records that historically have enjoyed attorney-client and work-product protection. Forcing waiver of these privileges as a condition for doing business with the government may be counterproductive, and hardly fosters a cooperative contracting environment.

As written, the proposed rule is also ambiguous when it seeks to describe when and under what circumstances disclosure is required. No explanation is offered as to what constitutes “reasonable grounds” to believe a criminal law has been violated. Traditionally, contractors discovering reasons to suspect misconduct conduct internal investigations under company ethics programs to determine if a violation has been committed.

The proposed rule offers no guidance as to when any grounds for suspicion ripens into a reasonable belief that a violation has occurred. Nor is the demarcation between criminal and civil violations clear cut. The rule’s timeliness requirement also is confusing. A contractor who has some reason to suspect wrongdoing, but decides to wait for conclusive information as to a potential criminal violation, may or may not commit a violation in the process.

These ambiguities will likely result in both underreporting and costly over-reporting of possible violations. Conservative contractors may report upon the slightest grounds for suspecting wrongdoing for fear of violating the “timely” and “reasonable grounds” elements of the rule, wasting government time and resources more appropriately devoted to legitimately serious contractor misconduct.

Other contractors may choose not to investigate anomalies they would otherwise look at, for fear of discovering information that might qualify as reasonable grounds for suspecting a violation, thereby triggering the self-reporting requirement. Additionally, lower-level employees may be reluctant to come forward and report potential violations to management, knowing self-disclosure is required.

A more effective response to recent high-profile examples of fraud in government contracting would be to strengthen the existing voluntary disclosure program and to let the Federal Acquisition Regulation’s recent mandate for written company codes of ethics work.

It is unclear whether or when the proposed rule will become final, although the attention it has received from Congress suggests increased mandatory disclosure is likely in some form.

L. James D’Agostino, a shareholder (dagostinoj@gtlaw.com) and Emily C. Parker (parkere@gtlaw.com), an associate with the international law firm of Greenberg Traurig LLP, are members of the firm’s government contracts practice group. The views expressed are solely those of the authors.

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