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Ethics Corner 

Tighter Rules For Conflicts Of Interest 


By Laura Kennedy 

This year, dramatic developments have changed the landscape for conflicts of interest in government contracting. The first-ever personal conflicts of interest (PCI) regulations were implemented by the Department of Treasury, and Congress enacted new organizational conflict of interest (OCIs) laws. These changes signal a new era of tighter rules governing actual and potential conflicts between the government and the contractor.

Historically, contractor employees have been free of the ethical safeguards imposed on federal employees, even when they both performed the same type of work. Congress looks to change that. In the Defense Authorization Act for fiscal 2009, Congress directed the Office of Federal Procurement Policy to coordinate with the Office of Government Ethics to study contracting methods that raise concerns for potential PCIs and revise the Federal Acquisition Regulations (FAR) as needed. 

Even before this study began, the first ever conflict of interest rules were published. On Jan. 21, the Treasury implemented new PCI regulations for contracts under the Troubled Assets Relief Program. If these rules serve as a model for FAR rules, contractors could be subject to burdensome conflict of interest requirements.

Treasury’s rules broadly define PCI as “a personal, business, or financial interest of an individual, his or her spouse, minor child, or other family member with whom the individual has a close personal relationship, that could adversely affect the individual’s ability to perform under the arrangement, his or her objectivity or judgment in such performance, or his or her ability to represent the interests of the Treasury.”  

Contractors must verify extensive financial information about their management employees and key individuals who work on covered contracts. This information sometimes mirrors data federal employees must disclose on financial disclosure Form SF-278, which solicits information about filers’ property interests and other assets, transactions of property and investments, gifts, reimbursements and travel expenses, liabilities, arrangements with employers and outside positions and pay exceeding $5,000.  

Merely reporting this information to the government to determine whether an improper PCI exists is not enough. Contractors must analyze the information, identify improper conflicts and disqualify such employees from performing contract work absent mitigation measures that effectively neutralize the conflict.

Contractors must also implement procedures designed to discover, monitor and report PCIs on a continuous basis and certify annually that management and key individuals have no issues. They must retain information needed to comply with this rule for three years following contract termination.

Treasury rules also treat contractor and government employees identically as to gift rules, barring acceptance or solicitation of gifts from anyone seeking official action from Treasury, with severe penalties for accepting anything of value in exchange for influence over any official act. These rules are a first, but may be the harbinger of new rules government wide, applying the same financial disclosures and gift rules to contractor and government employees alike.

By early next year, defense contractors also will face tighter organizational conflict of interest rules. Experts believe these rules will adversely affect some of the larger defense contractors. In the Weapons Systems Acquisition Reform Act enacted on May 22, Congress directed the Defense Department to promulgate rules “to provide uniform guidance and tighten existing requirements for organizational conflicts of interest by contractors in major defense acquisition programs.” These regulations will address a variety of OCIs, including those arising from:

• Lead systems integrator contracts on major defense acquisition programs;
• Ownership of business units performing systems engineering and technical assistance (SETA) functions and other services for major defense acquisition programs by the same contractors that own business units competing for work under those programs; and
• Performance of technical evaluations on major defense acquisition programs.

SETA contractors will be barred from participating in the actual system development or construction. Once these new rules apply, defense contractors will no longer merely be obligated to mitigate potential conflicts with firewalls and other measures. They will be barred from even competing on programs that could create such conflicts.

The Defense Department also will be required to obtain independent advice on engineering matters. It must solicit advice on systems architecture and engineering matters from federally funded research and development centers or other sources independent of the prime contractor, ensuring such advice comes from “objective and unbiased” sources.  

The new tighter controls on conflicts of interest are forcing contractors to become more vigilant to free their relationships from conflicts in all its forms. As these new rules take hold, contractors must augment their procedures to address these stricter requirements.

Laura K. Kennedy is senior vice president of ethics and compliance at SAIC Inc.  The views expressed are solely those of the author.
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