Contractors’ Conflicts of Interest Under Scrutiny

Contractors may soon be required to police their employees’ personal conflicts of interest. In March 2008, the Government Accountability Office issued a report entitled, “Defense Contracting, Additional Personal Conflict of Interest Safeguards Needed for Certain Department of Defense Contractor Employees,” recommending new department-wide safeguards and policies to limit personal conflicts of interest involving contractor employees working alongside government employees.

At the request of the chairman and ranking member of the Senate Armed Services Committee, GAO conducted a 15-month study of defense contractor employees working in Defense Department operations, the type of work the contractor employees were performing and the safeguards currently in place to prevent personal conflicts of interest from arising. GAO found that while the department has significantly increased its reliance on contractors, there are few safeguards in place to identify and mitigate personal conflicts of interest for such defense contractor employees.

The GAO review defined “personal” conflict of interest (PCI) differently from an “organizational” conflict of interest (OCI).

An OCI exists whenever a government contractor could take unfair competitive advantage because of access to proprietary or source selection information or by having conflicting contract roles that biases its judgment. For example, under the Federal Acquisition Regulation, a company awarded a contract to prepare specifications and performance criteria as the basis for equipment competition would be excluded from competing for the equipment acquisition.

In contrast, a PCI applies to individual employees “in a position to materially influence Defense Department recommendations and/or decisions,” who could lack objectivity because of his or her personal activities, relationships or financial interests. For example, a contractor employee who exercises influence over acquisition decisions may lack objectivity where a spouse’s company or stock portfolio stand to benefit from a procurement decision.

GAO’s recommendations will require contractors to implement written codes of business ethics and conduct that would bar contractor employees from participating in a government contract in which they have a personal conflict of interest. They would require the contractor to review and address any personal conflicts of interest its employees might have before assigning them to deliver contracted services, and would bar contractor employees from later using non-public government information obtained during performance under a contract. The codes also would limit contractors from accepting gifts in connection with contracted duties.

The Defense Department already has established a panel to review and respond to GAO’s recommendations. GAO also cited government officials who were concerned that the current rules failed to govern adequately contractor employees having personal conflicts of interest. While GAO’s review focused on defense contractors, other federal agencies have the same issues.

GAO reviewed 21 Defense offices and found large percentages of their workforces consisting of contractor employees. In 15 offices, contractor employees were 88 percent of the workforce. As a result, the need to subject contractor employees to the same ethics laws and policies as their federal employee counterparts is obvious. The Defense Federal Acquisition Regulation Supplement for years has required defense contractors to implement ethics and compliance programs, and the Federal Acquisition Regulation was revised in December 2007 to require the same for most procurements greater than $5 million, whether serving as a prime contractor or as a subcontractor.

In addition, many of the offices reviewed by GAO have adopted safeguards, including contract clauses requiring contract employees to be free from personal conflicts of interest. As yet, no government-wide or even defense-wide requirements for contractors make the avoidance or mitigation of employee personal conflicts of interest part of their ethics programs. Other than a federal law barring bribes, kickbacks, and other forms of graft, which applies to both federal employees and contractor employees, there are no other restrictions on federal employees as yet applicable to contractor employees — such as giving or accepting gifts or gratuities, or filing financial disclosures. Consequently, there is little or no assurance to the government that the contractor employees’ “advice and assistance” is free from actual or potential personal conflicts of interest.

Ethics program requirements inevitably will continue to be expanded to cover contractor employees.

Richard L. Moorhouse is a shareholder (moorhouser@gtlaw.com) and Sean M. Connolly (connollys@gtlaw.com) is a senior associate with the international law firm of Greenberg Traurig LLP, as members of the government contracts practice group. The views expressed are solely those of the authors.

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