Agencies Becoming More Aggressive in Pursuit of Contractor Wrongdoing

By Todd J. Canni and Frederic M. Levy

After years of congressional complaints, federal agencies are responding to concerns about how they handle contractor debarments and suspensions. New civilian debarment offices have emerged and are becoming active. 

Agencies are becoming more aggressive in their pursuit of cases. In the past, most suspension debarment officials focused on cases supported by some judicial action as an underpinning for a suspension or proposed debarment — indictments, pleas, convictions, deferred prosecution agreements, civil judgments and settlement agreements. It is now more common to see more “fact-based cases” in which ethics issues fall short of criminal conduct, questionable business practices and contract performance issues. Such cases are based on mere allegations of wrongdoing and may be supported only by investigative interviews, contractor disclosures or contracting officer decisions. 

As agencies become more comfortable handling fact-based cases, such actions are coming earlier in the investigative or judicial process. 

This development presents significant issues for contractors. Companies now may face suspension or debarment proceedings before they have had the time to ascertain relevant facts, let alone disclose them to the government or remediate the circumstances that allowed the events to occur. This is especially true for cases involving contracts performed overseas or in a war zone, where information flow is slow and compliance may not necessarily be a top priority.

Contractors are at an increased risk of finding themselves or their personnel before agency debarring officials. This is equally true for small and large contractors. 

The consequences can be ineligibility for new awards and collateral reputational harm. Such inquiries can be costly to address. Even a seemingly isolated compliance issue involving no more than a handful of people can lead a suspension debarment official to determine that the issue is emblematic of a broader, systemic problem. To resolve the debarment matter, particularly through an administrative agreement, the SDO may require the contractor to assess companywide ethics and compliance programs. These reviews would be conducted by an independent expert, and a company would have to agree in advance to implement the expert’s recommendations, and to retain an outside monitor to oversee and verify implementation and compliance. SDOs will insist that such costs be treated as unallowable under government contracts.

With decreased procurement dollars and many programs at risk of extinction, there is increased pressure to capture new business. Employees feel this pressure even if management does not explicitly exert it. These circumstances will inevitably put individuals, even the most ethical, in a position where they are confronted with the decision of whether to cross the legal line or, more likely, with having to decide how far to venture into gray areas of ethical and legal behavior. Contractors should take a close look at their business capture approaches, including the use of non-public information and the recruitment of personnel from the government and competitors. 

Individuals come into contact with information from their government customers, competitors, consultants and colleagues. Contractors must ensure they have programs, training and internal controls in place to ensure personnel are intimately familiar with the restrictions on using sensitive, non-public information, including company proprietary information, competitor proprietary information, government non-public information, source selection information and bid or proposal information. These programs not only should cover employees, but also consultants. 

When provided or confronted with access to such information, employees must understand that they cannot assume it was obtained properly and lawfully, and the organization should install protocols to ensure the origins of sensitive information are identified, recorded and tracked.  

The hiring of former government personnel or employees from either competitors or the government also presents risks. New hires could be unaware of their new employer’s compliance practices and ethics standards. They may come bearing their former employer’s sensitive proprietary and non-public information, or with connections that provide access to such information. And regardless of their best intentions, they may have been involved in programs or activities that create a conflict of interest that must be disclosed.
Contractors should fully vet new employees, ensure that new personnel are aware of the ethics and compliance standards of the company, and that both the new employees as well as the employees who will interact with them understand the compliance issues and risks.

Agencies are under pressure to detect and address fraud, waste and abuse and to make the most of scarce procurement dollars. Procurement officials increasingly are being trained regarding suspension and debarment and are being encouraged to refer instances of questionable conduct to debarring officials.

Contract disputes — including cases involving alleged poor performance or disputes regarding contract interpretation — regularly are brought to the attention of a suspension debarment official. This should cause contractors to review the way they handle and respond to performance disputes. At a minimum, contractors should assume that agency SDOs are actively evaluating contracts terminated for default and cause, including delivery and task orders. 

Where performance problems are unavoidable, it is recommended that contractors advise their customers as soon as possible, and preferably in advance of the issue, so as to avoid compounding the issue by potentially making the customer believe they were misled. 

Notably, a number of agencies now require contracting officials to refer terminations for default and cause to the agency SDO.

Even the most sophisticated and extensive compliance and ethics programs cannot preclude the likelihood that at least one employee in an organization at some time, intentionally or inadvertently, will break the rules. SDOs generally are pragmatic and understand this reality. When contractors were employing best practices in their ethics compliance programs, detected the non-compliance and self-disclosed it promptly in a complete and candid manner, SDOs often will determine that the contractor acted responsibly and nothing more will come of the situation. The benefits to contractors of candid and complete disclosures cannot be overstated. Companies should commit appropriate resources to fully investigate such matters and ensure their disclosures are thorough.

Further, it is important that contractors avoid treating as insignificant non-compliance issues which, when viewed discretely, have minor financial impact or collateral consequences.

Contractors of all sizes struggle with when and how much to disclose, and to whom. They should always strive to disclose early. For long running investigations, this may necessitate an early initial disclosure with periodic updates. 

Ideally, the disclosure would be a self-contained document that would assure the most skeptical reader that the contractor had fully investigated the situation and, if appropriate, taken disciplinary action. The government should come away feeling all of its questions had been answered and there is no need to conduct its own investigation. 

Most disclosures are provided to the agency suspension debarment official. If the SDO senses the disclosure was less than candid or complete, there is a significant possibility that rather than asking questions, the SDO will issue an inquiry. To minimize the likelihood of a government investigation, disclosures should include a discussion of the contract or program involved, the nature of the non-compliance, when it happened, the circumstances giving rise to the non-compliance and how it was discovered.  The disclosure also should have a description of any harm caused to the government, financial or otherwise, and how the contractor addressed or rectified that harm, who was involved, his role with the company, and what relevant training, if any, they were provided before the event.

After identifying a non-compliance event, contractors sometimes try to determine whether the event triggers the mandatory disclosure rule in the Federal Acquisition Regulation. But whether an issue falls outside the scope of the mandatory disclosure rule should not be the end of the inquiry. The range of conduct that could give rise to a suspension or debarment is much broader than the conduct covered by the mandatory disclosure rule.

If the contractor decides to make a voluntary disclosure, it need not necessarily be addressed to the inspector general, as is required in almost all circumstances. Careful consideration should be given as to which government officials should be informed or would appreciate learning of the matter. In some cases, it may be advisable to share the disclosure with a broader group within the government, including customers and the agency SDO. There is a significant likelihood that these individuals will be apprised of the situation, and the contractor benefits from having brought it to that person’s attention directly. 

Contractors are advised against informal or casually-relayed “soft disclosures,” where the disclosing party informs a low-level program official orally, via voice mail or e-mail. The government ultimately may not view this as a genuine attempt to disclose. Once a contractor has made the determination voluntarily to disclose, it is important that the disclosure be thorough, complete and accurate, just as in the case of a mandatory disclosure. A less than candid voluntary disclosure itself could be referred to an agency SDO and be the basis for a non-responsibility inquiry.

To date, agency SDOs have not focused on classified programs, and the intelligence agencies have not actively been engaged in suspension and debarment. This stems from a reluctance to expose classified programs to outside scrutiny, and because agency SDOs are not equipped to handle an administrative record containing classified information. 

But defense and intelligence agencies have not been immune from criticism for failing to use suspension and debarment in all of their programs, including classified ones.

As federal spending declines, some contractors may be tempted to commit fewer resources to their internal governance programs. That would be misguided. The current environment is likely to be one of increased scrutiny and enforcement, of heightened focus on contractor commitment to ethics and compliance.

Contractors should ensure that they are implementing programs appropriate to their size and business risks, such as values-based ethics training, a robust internal hotline program, a process fully addressing all complaints received in a timely manner, compliance processes and training in government contracts and disclosure protocols.

Todd J. Canni is counsel in the Washington, D.C., office of McKenna Long & Aldridge LLP and also serves as co-chair of the ABA Public Contract Law Section Debarment and Suspension Committee. Frederic M. Levy is a partner in the same office and serves as co-chair of the ABA Public Contract Law Section Debarment and Suspension Committee.

Photo Credit: Thinkstock

Topics: Business Trends, Doing Business with the Government, Defense Contracting, Defense Contracting

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