Industry Braces for Bigger Crackdown on Corruption

By Sandra I. Erwin
A deteriorating relationship between government and contractors may be about to hit rock bottom.

Amid a general climate of distrust — exacerbated by a slew of high-profile procurement fraud cases in recent years — federal regulators recently introduced new anticorruption rules that lawyers inside the Beltway have characterized as unprecedented in their scope and power.

As of Dec. 12, all government contractors regardless of size are required on penalty of suspension or debarment to disclose to their federal customers in a timely fashion any credible evidence of improper conduct by any of the company’s employees. This includes illegal gratuities, kickbacks, conflicts of interest or failure to notify the government of an overpayment.

In the past, contractors only were expected to make “voluntary” disclosures of misconduct. But the Department of Justice argued that the previous policy did not go far enough and asked the Federal Acquisition Regulatory Council to modify the rule to make disclosures mandatory.

For most contractors whose livelihood depends on federal dollars, the punishment for failing to divulge evidence of wrongdoing is the equivalent of the death penalty.

The new rule has generated mixed reviews from the legal community. Some experts believe these are necessary measures to prevent wrongdoing, particularly in defense and military contracting where most federal discretionary spending occurs. They view it as a continuation of an aggressive push by Justice that began two years ago with the creation of a National Procurement Fraud Task Force. The task force is credited for having prosecuted more than 300 procurement fraud cases that have resulted in convictions, charges, civil actions or settlements. At least 50 individuals have been criminally charged with procurement fraud associated with war contracts in Iraq, Afghanistan and Kuwait.

But some attorneys worry that the government may be opening a Pandora’s box. By requiring companies to become de facto government informants, the new measures may create legal “gray areas” that could lead to massive litigation down the road. If companies are expected to disclose their own ethical breaches, they could be denying themselves the right to a legal defense. The mandatory disclosure regime also puts too much guesswork into the system, some lawyers contend. Company executives will be expected to turn in their own employees for suspected crimes even if they are not sure whether the act was intentional or an inadvertent human error.

Large defense contractors already have established what are known as “internal controls” to deal with these issues. They also have armies of lawyers and ethics officers who provide counsel. But many lower tier subcontractors and small businesses will find themselves far more vulnerable because they may not have the in-house expertise to understand what is appropriate and what constitutes “credible evidence” of an ethical breach.

“Companies will find themselves in quite a Catch-22,” says Jonathan S. Aronie, a government contracts lawyer at Sheppard Mullin Richter & Hampton LLP.

Aronie says companies are taking the regulations “very seriously” but he wonders how they will cope with the legal complexity of being contractors and informants at the same time. “We’ll have to see how far the government will go in applying the penalty,” Aronie says. Contractors also should brace for a possible onslaught of whistleblower lawsuits.

Companies also will have to gauge whether coming forward with disclosures and exposing themselves to criminal charges will outweigh the risks of not disclosing and being debarred if the government finds out the company was holding back evidence.

Aronie and other lawyers view this latest wave of regulation as a knee-jerk reaction to highly publicized corruption cases, most of which occurred after the invasion of Iraq and the infusion of hundreds of billions of dollars into a procurement operation that lacked adequate oversight.

Because of the actions of a handful of bad actors, everyone now is paying a huge price, Aronie says.

Time will tell whether the new rules will deter future crimes, he says. Acquisition experts say that in the long run, the government would be better off investing in recruiting and training high-quality contracting officers who can help prevent trouble.

In a recent industry survey, government acquisition professionals complained that contracting officers were not receiving enough training on procurement fraud issues. They also characterized the acquisition workforce as living in a climate of fear where managers react to media stories and neglect to address the underlying causes of the problem, such as shortfalls in education and training. The survey was conducted by the Professional Services Council, an industry association, and Grant Thornton, a global accounting firm.

The morality of the industry has been questioned, in some cases for good reasons, says Stan Soloway, president of PSC. The results of this survey, he says, confirm that the government should stop “legislating by headline” and instead should take a broader “policy by analysis” approach to fixing systemic problems.

For the foreseeable future, however, the big winners in the anti-corruption sweepstakes will be the lawyers, who can expect to see their business skyrocket as a result of the new rule. Aronie aptly calls it the “Government Contracts Lawyer Full Employment Act of 2008.”

Topics: Defense Contracting, Defense Contracting

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