Ethics Corner

June 2005

Raising the Bar To Meet the Next Wave of Reform

By L. James D’Agostino

Recent procurement scandals have prompted numerous ethics reform initiatives by federal prosecutors, regulators and legislators. Given the volume of spending related to Operation Iraqi Freedom and on-going homeland-security initiatives, the industry can expect the greatest level of scrutiny since Operation Ill Wind in the 1980s.

While the current impetus for this intensified scrutiny may be the recent revolving door scandals and indictments, all companies should closely examine their entire compliance programs for vulnerabilities and risks.

In the wake of the Druyun scandal, the U.S. Attorney’s Office for the Eastern District of Virginia created a Procurement Fraud Working Group. The Defense Department initiated an investigation of former government officials to determine whether the post-employment restrictions were violated. The acting undersecretary of defense for acquisition, technology and logistics instructed the Defense Science Board to prepare a report recommending actions to protect the integrity of acquisition decisions and to restore public trust.

The Office of Government Ethics recently recommended the application of federal employee ethics rules to contractor employees. The House Armed Services Committee has requested a Government Accountability Office report on the revolving door issue, which Congress may address in legislation this year.

These activities will impact defense contractors, whether or not they are individually subjected to an investigation. NDIA’s Statement of Industry Ethics speaks of “ethical readiness” to promote the health of the defense sector. These reform initiatives demonstrate why companies need a proactive response to the current environment. When industry does not act, regulators will seek to fill the void, and industry self-governance will suffer as a result of a few bad actors. In addition to public advocacy of industry positions, that proactive response should include a top-to-bottom review of current practices, policies and procedures to identify risk and make appropriate adjustments.

The creation of the U.S. attorney’s working group signals a shift in prosecution resources to defense procurement matters. In announcing its formation, the U.S. attorney specifically targeted procurement fraud, including product substitution, defective pricing, irregularities in contract formation, misuse of classified or other sensitive information, labor mischarging, accounting fraud, fraud involving foreign military sales and ethical and conflict-of-interest violations.

Members of the working group include the Federal Bureau of Investigation, the Defense Criminal Investigative Service, the Naval Criminal Investigative Service, and the inspectors general of the Departments of Homeland Security, State and Transportation, and the National Reconnaissance Office.

On the regulatory front, the Office of Government Ethics advocates subjecting contractor employees to the same ethical rules as federal workers. In a February 8 letter to the SARA Advisory Committee (known as the “1423 panel”), the OGE called upon the panel to impose government ethics rules upon contractors. Specifically, the OGE proposed amending acquisition regulations (FAR Part 9) to address ethics and personal conflicts-of-interest raised by contractors. It proposed creating solicitation and contract clauses binding contractor employees to particular ethics standards, requiring contractor personnel to receive training on government ethics rules and mandating certifications that contractor personnel will not cause their government counterparts to violate the conflict-of-interest laws and ethics rules.

Similar to the response of many to Sarbanes Oxley, some 1423 panelists expressed concern that applying federal ethical guidelines to contractors would overburden them with more regulations. Those panelists viewed recent problems as individuals exercising poor judgment, which is inherently difficult to regulate, but would certainly be costly.

On still another front, the Defense Department instructed the Defense Science Board to prepare a report to the acting undersecretary of defense for acquisition, technology and logistics that recommends specific actions. A DSB task force reviewed the structure of the current acquisition authority and its processes, and analyzed hundreds of contracts awarded during Druyun’s employment. The task force recommendations likely will include higher-level review and approval of contract awards, as well as more in-depth justifications for award decisions.

The Defense Department also launched the Senior Official Project (SOP) to investigate a pool of former senior military and civilian managers now working for government contractors for possible criminal violations of federal conflict-of-interest rules. SOP uses data mining to review contracts for names of former officials who might have negotiated or managed contracts with their future employers. If defense managers recuse themselves from government contracts they negotiated, they legally can accept positions with the contractor.

While it is too early to determine how long this inquiry will last, or whether charges will be filed against individuals, the SOP is working through a list of former officials to detect possible violations.

L. James D’Agostino is an attorney at Greenberg Traurig LLP, in McLean, Va.

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