Time to Rethink Mandatory Disclosure Rule

By David Robbins

Photo: iStock

The Federal Acquisition Regulation’s Mandatory Disclosure Rule was published nearly 15 years ago, yet contractors are still wrestling with confusion caused by its undefined terms.

For background, the Federal Acquisition Regulation contract clause containing the rule — FAR 52.203-13 — instructs contractors to “timely” disclose in writing to the agency office of inspector general — with a copy to the contracting officer — whenever, in connection with the award, performance or closeout of a contract or any subcontract thereunder, the contractor has “credible evidence” that a principal, employee, agent or subcontractor has violated criminal law involving fraud, conflict of interest, bribery or gratuity violations found in Title 18 of the U.S. Code, or the civil False Claims Act.

FAR 9.406-2 names as a cause for debarment knowing failure to disclose to the government “significant overpayment(s)” on the contract.

The emphasized terms are not defined by the government. The rule itself has no definitions, and the government has never issued guidance concerning the terms in the intervening years.

Government, industry and law firms have come up with various methods of dealing with these undefined terms.

“Timely” is a particularly difficult term to define. The Department of Justice has in the past indicated its desire to learn about early-stage misconduct so it can investigate alongside the contractor. But the “unwritten rules of disclosures” acknowledge that contractors have time to investigate and understand what the underlying issues are before a disclosure would be required.

The definition of timely is also impacted by the complexity of the underlying conduct. For example, civil False Claims Act actions are difficult matters to prove, and determining whether credible evidence exists can involve an expansive investigation into facts and a deep dive into the law. In comparison, time mischarging — which accounts for a significant percentage of disclosures — takes less time to assess.

“Credible evidence” is also a vague term. The unwritten rules set forth in a number of Justice Department, Defense Criminal Investigative Service and legal presentations over the years indicate that “credible evidence” is less than preponderance, but nobody can define how much less.

Early on, Justice recognized some investigation was necessary to understand whether the evidence was “credible” but, again, the department wanted to know about issues early. “Credible evidence,” therefore, appears to balance the need for a contractor to investigate with the desire of the Justice Department to know about early-stage allegations.

“Significant overpayment” is also undefined. As the government has pointed out time and again, there is no minimal standard for disclosure.

The unwritten rules have developed interesting patterns. Some contractors disclose everything. One case with the Air Force was for an approximate $7.50 overcharge. The rule leaves open the option to interpret “significant” in a reasonable way.

So, what is a contractor to do when evaluating disclosures? On the one hand, because the “unwritten rules” appear to have created a system that is working, the answer may be to continue to do what the contractors have been doing until something changes. On the other hand, new announcements out of Justice may suggest it is time for contractors to reevaluate their disclosure practices.

It is important to remember that the Mandatory Disclosure Rule was born from a sentiment that contractors were not disclosing misconduct, and that misconduct was common. It came into existence in a time when Justice’s national procurement fraud task force was active and Congress passed the “Close the Contractor Fraud Loophole Act,” among other initiatives.

It is reasonable to assume that the Justice Department expected prosecutions and civil fraud cases to arise from mandatory disclosures. But with nearly 15 years passing, it doesn’t seem like Justice received what it expected. The lack of metrics measuring the “success” of the rule is a source of confusion.

Are there enough disclosures? Are they the “right kind” of disclosures that the government expects? Are contractors more ethical than the government thought when enacting the rule? Do disclosures lead to any meaningful recoveries for the government, and do those recoveries outweigh the time and expense of making disclosures? Are contractors simply significantly more ethical than the Justice Department expected? All these questions remain unanswered.

The Justice Department is again focused on corporate misconduct. On Sept. 15, Deputy Attorney General Lisa Monaco issued a memorandum and delivered a speech that announced several revisions to corporate criminal enforcement policies and practices. The revisions emphasized among other things that cooperation must be timely, clarified how prosecutors should evaluate a company’s record of prior misconduct when deciding how to resolve a criminal investigation and further discussed the department’s expectations of corporate compliance programs.

Since the announcement of the policy changes, multiple stakeholders within the government contracts community have wondered whether the changes would impact government assessment of the Mandatory Disclosure Rule.

Taken a step further, the government contracts community should also wonder whether disclosures might eventually be analyzed by Justice as part of a company’s record of prior misconduct.

It is too early to tell if the risk landscape facing government contractors contemplating submitting mandatory disclosures has changed. But ethical conduct calls for contractors to do the right thing, which should include the contractor’s interests and protecting the company where permissible within the scope of the applicable regulatory regime.

Blindly following the same disclosure path and providing multiple disclosures in an abundance of caution may no longer be the best way to protect a contractor.

David Robbins is co-chair of the government contracts practice at Jenner & Block.

Topics: Defense Contracting

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