In light of a recent series of isolated, highly controversial public scandals
with respect to several major defense acquisition programs, it is important
to create “safe harbors” of conduct so that both government and
contractor personnel can work as a cohesive team to speed the fielding of critical
technologies for both the war on terrorism and the Defense Department’s
transformation initiatives.
Responding to a government investigation over possible procurement improprieties
is costly and diverts a defense contractor’s attention away from the primary
objective of supporting the customer. The Defense Department, for its part,
has a critical interest in preserving the integrity of the federal procurement
system to ensure public confidence in government expenditure of the $2 trillion
annual federal budget. It is therefore beneficial to both the government and
contractors to create “safe harbors” of future conduct. A “safe
harbor” list of do’s and don’ts is offered in this article.
A fair procurement process that encourages healthy competition and rewards
innovation ensures that U.S. military forces have the decisive advantage on
the battlefield. Procurement integrity problems, whether intentional or inadvertent,
detract from efforts to improve lethality, combat capability and survivability
for American troops in combat. It also fosters public distrust of the government.
Procurement Impropriety Claims
Claims of alleged procurement improprieties arise under different scenarios.
A wide array of prohibited conduct is covered by statutory and regulatory restrictions.
To avoid inadvertent procurement improprieties, both government employees and
contractors must know these fundamental rules. There are several issues that
trigger the “appearance of impropriety” in procurements and become
bases for contract cancellation, civil claims by the government and criminal
enforcement by government:
Misuse of Another Company’s Trade Secrets. On July 24, 2003, the Air
Force announced the reassignment of $1 billion worth of launches from Boeing’s
Delta IV rocket program to Lockheed Martin. The Air Force also suspended three
Boeing divisions from future competitions pending corrective Boeing action.
The Air Force concluded that Boeing was in possession of proprietary Lockheed
documents during the 1998 Evolved Expendable Launch Vehicle (EELV) source selection.
Most recently, the Department of Justice is publicly rumored to be contemplating
asserting civil damages against Boeing as a result of the alleged improper conduct
during the EELV source selection. These damages range potentially from $100
million to $170 million in projected Air Force program costs to shift launches
to Lockheed Martin, which could arguably rise to between $300 million and $500
million, if applied in a controversial offensive manner. Civil damages have
traditionally been limited to actual overpayments to the offending contractor,
and have not included reimbursement of additional program costs incurred by
the government to maintain competitive balance after a procurement impropriety.
Improper Employment Discussions. Boeing terminated the employment of two company
officials for allegedly violating corporate policy governing employment discussions
with government officials during the $17 billion Air Force tanker lease negotiations.
Appearance of Conflicts of Interest. On March 27, 2003, Richard Perle, chairman
of the Defense Policy Board, resigned his chairmanship in the face of “appearance
of impropriety” and potential conflict-of-interest allegations. As chairman,
Perle advised the Pentagon on policy matters. Members of Congress charged that
Perle’s representation of bankrupt Global Crossing, Ltd., in the proposed
sale of the company to Singapore Technologies Telemedia Pte., created an appearance
of impropriety because Global Crossing might benefit from undue influence. Public
evidence strongly suggests that the representation was legal, but still created
the appearance of a conflict-of-interest.
Submitting False Statements to the Government. In 1999, Samtech Research, a
defense contractor, concealed the identity of a company owner who had previously
been debarred from future contracts by the government. This allegedly resulted
in other Samtech employees certifying falsely that no principal of the company
was suspended or debarred from government contracting, violating the criminal
False Statements Act.
Failing to Disclose Government Overpayment. The owner of Tech Data Management
received an eight-month prison sentence for concealing a $584,000 overpayment
by the U.S. Army. The owner allegedly failed to inform the Army, and then used
a portion of the overpayment money for personal matters, creating a clear intent
to conceal and divert taxpayer money. The owner was charged with converting
government property for personal use in violation of Embezzlement of Government
Property statute.
Gratuities, Bribery. A U.S. Navy electrical foreman was fined $10,000 and sentenced
to 36 months probation for illegally accepting $9,300 in gratuities from a contractor.
The foreman had assisted McCaffrey Electric Inc. in obtaining a Naval Air Warfare
Center contract. The government employee was charged with violating the Federal
Anti-Bribery Act.
Kickbacks to Prime Contractors from Subcontractors. In October 2003, the Department
of Justice filed a civil complaint against Dynamics Research Corporation—a
long-time Defense Department and Air Force contractor—for penalties and
damages due to an alleged $10 million kickback scheme of two former DRC officers.
The government’s complaint alleged that DRC violated the Anti-Kickback
Act of 1986 by allegedly engaging in a scheme of kickbacks and overcharges for
computer systems.
Integrity Principles
The following represents a list of key procurement integrity principles that
are imposed upon both contractors and government employees:
1. Preventing the Appearance of Impropriety. Contractors and government employees
should always strive to avoid even the appearance of impropriety, including
the appearance of any personal conflict of interest. The general test is whether
a “reasonable person in possession of the relevant facts” would
see anything wrong or improper in the conduct.
2. Avoiding Civil and Criminal Conflicts of Interest. A personal conflict of
interest arises when a government employee’s relationships compromises
the integrity of the procurement system. That is separate and distinct from
an organizational conflict of interest, where potential bias often can be mitigated
by firewalls or non-disclosure agreements. There also is a criminal statute
which prohibits government employees from participating in any government matter
that may affect the employee’s financial interests.
3. Bans on Gifts From Contractors. Generally, government employees are prohibited
from soliciting or accepting significant gifts from government contractors.
Regulations also prohibit gifts given by contractors to influence performance
of official duties, or frequent gifts that create the appearance of use of public
office for private gain. The primary rule is to avoid even the appearance of
bias, favoritism, or impropriety in any federal procurement.
4. Prohibition Against Employment Discussions. A government employee is prohibited
from working on any matter that has a direct impact on the financial interests
of the prospective employer without first receiving a written waiver. Criminal
sanctions include up to one-year imprisonment or, if willful, five years, and
a possible fine of $50,000 for each violation.
5. “Revolving Door” Restrictions. Former government employees are
prohibited from representing a contractor on specific programs with which they
were involved while still employed by the government.
This includes a lifetime ban on communications that are intended to influence
the government on matters where the former government employee participated
personally in his or her official capacity. There is also a two-year ban on
communications by former government employees, who knew or should have known
that the matter was pending under his or her official responsibility during
the year prior to leaving government employment. There is a one-year “cooling
off” period for “senior employees” that restricts substantive
communications with the government employee’s former agency on behalf
of a contractor.
6. Misuse of Official Position. Government employees are precluded from using
their positions or government title “in a manner that is intended to coerce
or induce another person, including a subordinate, to provide any benefit”
to third parties.
7. Covenant Against Contingency Fees. Contractors may not pay contingency fees
for obtaining contracts because of the potential for disguised bribes or kickbacks
to government officials indirectly through contractor consultants. There is
a narrow exception, allowing contingency fees to be reimbursed to the contractor
from the government for bona fide employees or firms who specialize in marketing
and consulting, so long as they do not seek to assert improper influence upon
the government.
8. Employment Offers/Proprietary or Source Selection Information. The Procurement
Integrity Act generally prohibits contractors from knowingly having employment
discussions with procurement officials during competitions, unless the officials
recuse themselves. It also prohibits contractors from making any effort to improperly
obtain proprietary competing contractor information or government source selection
information during a competition.
9. The Civil False Claims Act. This act imposes civil monetary damages triple
the amount of actual government overpayment, plus a $5,000 - $10,000 civil penalty
per false claim submitted on any person who knowingly submits a false or fraudulent
claim for payment to the United States government. As a general rule, civil
damages are brought against contractors for billing the government for the contracted
product and then actually delivering a lesser/substandard item, or damages can
be asserted for actual payments to contractors where the contractor never should
have been awarded the contract due to improper conduct in the award. The government
generally elects pursuit of civil damages against the contractor, rather than
criminal prosecution, because of the lower burden of proof for the government,
greater recovery of damages to benefit of government, and greater financial
deterrent to contractors to police employees. Subcontractors also may be held
liable for submitting false claims to prime contractors.
10. The Criminal False Claims Act. This makes it a crime to knowingly submit
a false claim for payment to the government with knowledge of the falsity of
the claim. Criminal false claims occur when a contractor knowingly attempts
to be paid by the government for a false or fabricated claim. Subcontractors
may also be subject to criminal prosecution.
11. The Criminal False Statements Act. This criminal statute prohibits a party
from knowingly making a false statement (or material omission) to the government.
Violation of the act does not require the government to have relied upon the
false statement or even have had knowledge of the false statement.
12. The Trade Secrets Act. This criminal statute prohibits government employees
from disclosing “to any extent not authorized by law” specific categories
of information, including confidential and trade secret data of any third party.
13. The Anti-Kickback Act. This prohibits subcontractors from offering any
form of a kickback to prime contractors in the inducement of a subcontract from
the prime contractors. It also prohibits the prime contractor from soliciting
any form of a kickback from the subcontractor in exchange for the subcontract.
Do’s and Don’ts in Procurement
Because every situation is unique, companies always should consult with counsel
whenever there is a question that raises even the appearance of impropriety.
This listing is provided for general guidance only and must not be relied upon
as legal advice.
Contractor Do’s
- Request government personnel to serve in an unpaid capacity on contractor
management councils, business process reengineering teams or similar entities.
- Serve on government process action teams or similar entities.
- Participate in market surveys for products and services. This can include
providing product demonstrations or permitting the government to “test
drive” a product for a reasonable period of time.
- Upon government request, provide product specifications; or in situations
where contractor as a defense industry representative, assist government in
the preparation, refinement, or coordination of specifications or statements
of work.
- Engage in public exchanges with the government to enhance the understanding
of program requirements and industry capabilities before the government issues
solicitations.
- Submit unsolicited proposals as contemplated by federal regulations where
the contractor has identified innovative solutions.
- Communicate with members of Congress, subject to registration requirement
of the Lobbying Disclosure Act.
- Ask former government personnel who are employment candidates to provide an
opinion from their former agency regarding the propriety of their potential
employment as a pre-condition to being hired.
- Have systems in place that require company officers and employees to comply
with the highest ethical standards, and that make individuals accountable for
failures to do so. Companies should provide employees with periodic training
in procurement ethics.
- Become thoroughly familiar with the government ethics regulations (Title 5
of the Code of Federal Regulations) and the Defense Department Joint Ethics
Regulation (Directive 5500.7-R).
- Join industrial associations that present the government with industry views
on acquisition policy matters.
- Participate in trade shows, market products and services listed on GSA schedule
contracts and publish articles in professional publications.
Contractor Don’ts
- Offer gratuities to government personnel (except as permitted by the Government-wide
Ethics Regulation and the JER).
- Seek or obtain source selection or competing proposal information (except
as permitted under the Procurement Integrity Act).
- Seek special consideration directly or indirectly from government officials.
- Make any representation that the company can achieve certain results because
of its relationship with government personnel.
- Take any action that would compromise a government official’s ability
to faithfully and properly perform the functions of his/her position.
Government Employee Do’s