Implementing Evolving Disclosure Rules
By Richard L. Moorhouse
Federal government oversight, scrutiny of contractors and enforcement actions are on the rise.
Contractors are expected to have in place codes of conduct and robust ethics and compliance policies and procedures to meet the FAR 52.203-13 mandate to “timely” disclose violations of “federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code; or … a violation of the civil False Claims Act (31 U.S.C. 3729-3733).”
Credible evidence of such violations triggers this disclosure requirement, which runs for at least three years after final contract payment. Knowingly failing to disclose violations in a timely manner is grounds for suspension or debarment, which, aside from prison for officers or employees, is the worst consequence that can befall a government contractor.
The terms timely and “credible evidence” are not defined in either the FAR clause or in its implementing provision at FAR Subpart 3.10, leaving contractors, inspector generals, suspension and debarment officials and contracting officers to interpret these terms.
Even in the absence of a concrete definition, “timely” disclosure surely encompasses a reasonable period in which to conduct a preliminary examination of credible facts. Absent a reasonable examination of facts, any disclosure should be deemed premature. Every case is different, and will call for different inquiry and urgency, but the clock is ticking, and the lack of concrete definitions renders it incumbent upon contractors alerted to possible violations to move quickly in determining whether the evidence mandates disclosure.
An effective ethics and compliance program must include dedicated organizational resources, internal and external, that can be quickly tasked to examine any allegation or evidence of misconduct. Procedures and personnel integral to any ethics and compliance program must also be proactive in reviewing internal reports or audits that might reveal possible irregularities that warrant quick scrutiny that is sufficient to confirm or dispel the existence of “credible evidence” of a violation.
Any red flag that warrants further scrutiny should be reviewed by professionals brought in from the outside. Depending upon the facts, inside and outside counsel can often achieve this, which ensures complete objectivity and also legitimately allows the company to protect the process with applicable attorney-client and work product privileges. Counsel are also invaluable in protecting the company from misgauging issues such as timeliness and credibility of evidence, and also in assessing whether valid alternative explanations for the conduct in question exist that are consistent with lawful, good faith conduct, or whether violations are the more likely explanation.
Totally eliminating subjectivity from the review process is impossible. A qui tam action filed under the False Claims Act or receipt of a subpoena or request for information, for example, without more, does not automatically create a disclosure obligation. Such events do, however, render it incumbent upon the company to further investigate, and failure to promptly do so inevitably will put a company in a bad light should it later be determined that red flags in fact were substantiated by credible, concrete evidence that could — and should — have been uncovered by the company.
Sometimes investigations will uncover credible evidence of a violation that should be promptly disclosed to the government, sometimes even before a company’s internal investigation is completed. Violations relating to health or safety, for example, may expose contractors to post hoc sanctions if it later is determined that the company was guilty either of inaction or of inadequate action, which led to the failure to disclose. Nothing prevents a contractor from making a disclosure and continuing to investigate after a disclosure is made, and this sometimes is the best way to demonstrate good faith in protecting the government’s legitimate interests during the pendency of an investigation.
On the other hand, undue emphasis on quick disclosure — and fear of the consequences for not doing so — hardly renders such disclosures a panacea. Unduly hasty disclosures based on poorly developed facts simply to attempt to shield the company from a “failure to disclose” allegation, may, in the long run, result in a huge waste of time and resources. Indeed, it may even gratuitously invite unneeded, heightened government scrutiny and a more rigorous investigation of facts that simply did not warrant all the concomitant distraction.
In conclusion, the disclosure requirement mandates a careful balancing in every instance when evidence of potential violations surface — a balancing that includes credibility and urgency, and when the government ought to know what is going on.
Although there is no hard and fast formula that will guarantee that a contractor’s judgments and that of its counsel will mirror the judgments of the governments’ various watchdogs, if it is clear that the company moved with proper haste in conducting its investigation, and acted promptly and reasonably in effecting its disclosure obligations when the facts so warranted, the disclosure requirement should not pose a problem.
All a government official needs to know is that the company cared every bit as much as the official did about the conduct of its employees.
Richard L. Moorhouse is a shareholder at Greenberg Traurig LLP. The views herein are his alone.