Beware of State, Local Pay-to-Play Laws

By Steve Epstein
Many companies that have provided goods and services to the U.S. military are now evaluating new markets with state and city law enforcement agencies, which are seeking sophisticated security systems to address their expanding public safety needs. 

Before making this leap, vendors should understand that states, cities, regional authorities and other local governments also bring into play a new world of contracting and political compliance requirements.

In this world, the Federal Acquisition Regulation and the Defense Federal Acquisition Regulation Supplement don’t count. However, pay-to-play laws may derail even the best proposals.

Pay-to-play laws are anti-corruption measures enacted by at least 22 states, as well as a number of cities and regional authorities such as the Los Angeles County Metropolitan Transportation Authority. These laws often are legislative responses to scandals in which elected officials awarded contracts  — particularly no-bid contracts — to individuals or companies that made substantial donations to an official’s campaign. 

While the awards may not have been influenced by the contributions, the appearance that the public official may have been improperly influenced by the contributions was sufficient to provoke the legislation.

While each pay-to-play law is unique to the enacting jurisdiction, the laws generally come in three flavors: Those that disqualify a contributor or fundraiser from bidding on contracts; those that bar an existing contractor from making campaign contributions or fundraising; or those that require contractors to report all campaign contributions and fundraising.

In general, political contributions over certain minimum amounts and fundraising activities will trigger the laws. The sources of such contributions include corporate treasury, company political action committees (PACs), subsidiaries and personal contributions from owners, directors, corporate officers or any employee who is involved in soliciting, administering or managing contracts with a pay-to-play jurisdiction. In Pennsylvania and Kentucky, all employees are included. And in many jurisdictions, spouses and minor children are covered.
New Jersey provides a perspective on how pay-to-play laws can affect a business plan. 

There, a bidder may not be awarded a contract with the state worth more than $17,500 if within 18 months preceding the start of contract negotiations, or during the term of office of the elected official, a business entity — including the company, company PAC, corporate director, corporate officer, owner or partner, or spouse of any of the above — solicited or contributed over $300 for the candidate, candidate’s committee or local political party.

In Maryland, vendors with contracts aggregating over $100,000 in a year must file disclosure reports that identify all contributions over $500 within a 24-month pre-award period, and submit subsequent semi-annual reports. The reports must include contributions from the contractor, contractor’s PAC, subsidiaries, personal contributions from the contractor’s directors and officers, and personal contributions from the subsidiaries’ directors and officers.

Failure to comply with pay-to-play laws may result in the company’s disqualification, debarment, or being subject to fines depending upon the jurisdiction.

From the compliance viewpoint, staying within the pay-to-play laws may be particularly difficult because the laws are triggered by legal acts — contributing to a political campaign — that are integral to the political process, and carried out by individuals who may not be corporate officers or employees such as spouses and minor children. 

Clearly, companies planning on contracting with states and local governments must have a political contribution compliance program in place. Such programs would have, at a minimum, several elements.

Companies may require their directors, corporate officers and employees involved in the soliciting, administering and managing contracts with states and local governments to pre-clear personal campaign contributions. In this case, corporate policies tailored for the company, board of directors, PACs and employees are necessary.

Further, the policies must be effectively communicated to personnel. Email or memos should be forwarded to corporate officers and employees individually, since they are direct, personal, hard to ignore and provide evidence of corporate due diligence if the employee should make a contribution that triggers the restrictions. Annual certification that these individuals have pre-cleared all political contributions and fundraising is also valuable as a reminder.

Companies can also subscribe to a service that provides current and comprehensive reporting of pay-to-play laws. In-house tracking and analysis of applicable legislation would overwhelm most legal departments.

Pre-clearance procedures for the company, members of the board and PACs should also be established. For employees, one common procedure is to require them to review a list of pay-to-play jurisdictions in advance of making a campaign contribution. If the candidate is not in one of the pay-to-play jurisdictions, the employee may make the contribution. If, on the other hand, the candidate is running for office in a pay-to-play jurisdiction, then the employee must contact a political contribution compliance office to obtain approval before making the contribution. 

When keeping records of contribution requests, it is important to maintain confidentiality, because many employees prefer not to disclose their political preferences. Employees must be assured that their requests will not be disclosed unless required by law. Records of requests, approvals and disapprovals must be maintained in order to meet the reporting requirements of some jurisdictions, and also to demonstrate good faith compliance by the company should a violation occur.

Like all compliance systems, effective controls must be implemented and periodically tested. Communications to employees  — particularly during campaign seasons — training and annual certifications help prevent unintentional violations.

Periodic updates of lists of employees who are subject to the pay-to-play restrictions also are necessary. Test controls by searching websites maintained by many jurisdictions that identify political donors for employees who have made donations without seeking pre-clearance.

The bottom line is if a company plans to enter the state and local government market, it should prepare in advance to respond to new and challenging compliance requirements, including pay-to-play laws.

Steve Epstein is the chief counsel, ethics and compliance for The Boeing Company. The views expressed are solely those of the author.

Topics: Defense Contracting, Defense Contracting, Procurement

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