Watchdogs make industry leery

Federal contractors must report evidence of crimes to inspectors general under new requirements

Contracting officers and government contractors will soon have someone new in their relationship: a watchdog.

Starting Dec. 12, contractors will be required to tell government officials if they find evidence of criminal activities related to a federal contract or if the government overpays them. The new rules allow federal officials to suspend or even debar a company from government work if the company knowingly fails to inform officials.

Experts say contractors are most concerned about the requirement that they inform two parties: the appropriate contracting officer and the agency’s inspector general.

Most contractors’ mistakes, including accidental overpayments, are minor administrative errors that contracting officers can easily fix, government and industry experts say. But because IGs have different responsibilities from contracting officers, the mandate makes contractors anxious about sharing even minor infractions with IGs.

“The rule goes too far,” said David Drabkin, deputy chief acquisition officer at the General Services Administration, adding that it won’t help relationships among contractors, agencies and IGs.

However, regulators say they wrote the rules with contractors in mind. They offer flexibility and allow companies to find credible evidence of a crime before reporting it. For agencies, reporting requirements will encourage relationships between IGs and contracting officers as they work together to root out fraud, regulators say.

The rules will have “contractors turning square corners and everybody walking with that halo over their head,” said Ernest Woodson, a procurement analyst at GSA who was instrumental in writing the regulations.

The sea change
The revision to the Federal Acquisition Regulation stands as a reversal from long-standing policies of voluntary disclosure.

“There is no doubt that mandatory disclosure is a sea change and major departure,” the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council wrote in a Federal Register notice outlining the rule.

But the councils said contractors have largely ignored voluntary disclosure policies for the past decade, as the Justice Department and the National Procurement Fraud Task Force have also charged. In May 2007, the department and task force proposed the FAR changes to Robert Burton, then deputy administrator of the Office of Federal Procurement Policy and now a partner at the Venable law firm.

“We believe that if the FAR were more explicit in requiring such notification, it would serve to emphasize the critical importance of integrity in contracting,” they wrote. The new mandates stemmed from that letter.

Burton said the rules will encourage contractors to institute vigorous processes for reporting internal criminal allegations and quickly reviewing the merits of those claims.

“The rule will add weight to the arguments inside a corporation that good business practices in the long run favor compliance and disclosure,” the councils wrote.

Lesley Field, acting OFPP administrator, said mandatory reporting is a sound business ethic and should already be part of companies’ standards.

Contractors might be more comfortable leaving the IG out of the process, but regulators say disclosing a crime to the contracting officer isn’t enough because he or she is in no position to evaluate criminal actions.

“Contracting officers truly wouldn’t know what to do,” Woodson said. “We don’t want the contracting officer interfering with an investigation that the IG or the Department of Justice may have to get involved with.”

Essentially, regulators want those crimes referred immediately to people with badges.
In a speech in November, James Graham, a trial lawyer in the Justice& squ ;s Criminal Division, said the proposal should improve procurement oversight when mistakes or criminal activities happen. Graham later told reporters that notifying the IG would make the contracting officer and IG work more closely together.

Graham, who also helped craft the regulations, said that although most contractors are honest, fraud is always possible, and the tendency toward corruption is constant.

“It’s the human condition,” he said.

Altering relationships
In public comments on the rule, many people disagreed with the mandate. One wrote that in 1986 a proposal from the Defense Department to make fraud disclosures mandatory foundered. In 1989, then-Defense Secretary Dick Cheney withdrew a proposed mandatory reporting rule on the grounds that “to be meaningful, corporate codes of conduct must be adopted by contractors voluntarily, not mandated in procurement regulations.”

Similarly, Elliott Branch, executive director of contracts at the Naval Sea Systems Command, said there must be a cultural shift in contractors’ thinking or the rules could be meaningless.

Many observers also say the new rules would likely keep the parties at a distance so they can avoid the appearance of wrongdoing.

“It could have a chilling effect on relationships between the contracting officer and the contractor,” Burton said.

Contracting officers and IGs view contractors through different lenses, said Michael Mason, a partner at the Hogan and Hartson law firm. For instance, contracting officers see companies as business partners that are trying to accomplish a contractual job for the agency. But IGs are the government’s watchdogs. They’re trained to sniff out fraud, waste and abuse and expose it. Experts say that focus will strain government/industry relations.

In public comments to the Federal Register, some industry representatives said reporting activities to the IG would take the ability to settle and resolve issues away from the contracting officer and agency. It undercuts the contracting officer’s right to handle a contract, they argued.

Furthermore, IGs have limited resources and staff, and disclosures will slow the procurement process, some commenters said.

Regulators say they realized that the rules would place more burdens on contractors. Therefore, they granted contractors flexibilities within the rules in an attempt to strike a balance.

“We want disclosure,” said a Bush administration official who requested anonymity. “On the other hand, we want to show some semblance of fairness where there’s uncertainty.”

When learning of an alleged crime, contractors can investigate the credibility of the allegation before telling the government, the official said, adding that “rumors are not enough to trigger the disclosure requirement.”

Until the contractor has determined the allegation’s credibility, federal officials can’t charge the contractor with knowingly failing to inform government officials. Regulators also declined to set specific timelines, saying they would be arbitrary and cause more problems than they would solve.

Despite regulators’ efforts to ease the burden on contractors, the industry remains unenthusiastic, said Richard Bednar, senior counsel at the Washington office of law firm Crowell and Moring and coordinator of the Defense Industry Initiative on Business Ethics and Conduct. In the end, contractors might focus on the rule’s loopholes and report fewer incidents.

But Bednar said the councils clarified many of the uncertainties when they published the final version of the proposed rule. Contractors can respond to the rules by “pulling up their socks and being responsible contractors,” he said.

&ldq o;I do think it’s digestible,” he added. 

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