Imagine a “Mandatory” Disclosure Requirement: It’s Easy if You Try
The Justice Department urges companies to voluntarily disclose FCPA violations. In exchange for a confession, DOJ offers companies two important benefits: (1) absolution for any criminal activity; and (2) a reduced criminal fine.
Companies that contract with the federal government face a different challenge – under federal contract law, companies are mandated to disclose criminal activity. If you want to do business with the federal government, you have to be prepared to confess your crimes.
Congress enacted the mandatory disclosure requirement in response to defense contractor abuses in Afghanistan and Iraq. The False Claims Act is the chief weapon used against contracting fraud. In 2011, FCA recoveries totaled $422 million, $100 million of which involved fraud in Iraq and Afghanistan. The Justice Department has recovered approximately $150 million in civil fraud cases relating to the wars in Iraq and Afghanistan. In a report released in 2011, the Commission on Wartime Contracting estimated that $60 billion may have been lost to contract waste and fraud in Iraq and Afghanistan.
The government has ample authority to impose a mandatory disclosure requirement on contractors. The government can use the power of its purse to impose conditions on recipients of federal funds. But can the government impose a mandatory disclosure requirement when issuing licenses, permits or granting other authorities? Could a mandatory disclosure requirement be imposed when issuing licenses to export goods?
For the last four years, federal contractors have been living under the mandatory disclosure regime. Congress enacted the requirement in June 2008 when it passed the Contractor Fraud Loophole Act, requiring the Federal Acquisition Regulation (FAR) Council to issue a rule mandating disclosure by federal contractors of certain violations of federal law involving fraud, conflict of interest, bribery, or gratuity violations; a violation of the civil False Claims Act; or significant over-payments of certain contracts. The rule requires a contractor to “timely” disclose such information when they have “credible evidence” of a covered violation or overpayment.
Any knowing failure by a principal to disclose credible evidence of a violation “on any Government contract awarded to the contractor” may be grounds for debarment or suspension. The rule includes a “look-back provision” which requires companies to disclose information relating to any contract where the government’s final payment was made on December 12, 2005 or later.
The mandatory disclosure requirement applies to those contracts which have a value of $5 million or greater, and a performance period of greater than 120 days. All government contractors which meet the threshold standard must have a written code of business ethics and conduct, and implement internal control systems and training programs designed to prevent and detect fraud.
Companies face enough compliance challenges today. If they are a federal contractor which meets the thresholds, companies face the challenge of additional compliance obligations for implementing a written code of business ethics and conduct, internal controls and training.
To ensure compliance, companies have to establish an effective code of conduct; provide mechanisms to report violations; implement training programs; adopt a process to vet potential violations; and decide whether the duty to disclose applies.
Does all this sound familiar? It should – it matches up pretty closely to requirements for anti-corruption compliance, health care compliance, and other well-established compliance programs.
Michael,
If we wanted perfect security we could just opt for a police state. Maybe that IS what the public wants. Seems like we are sliding down that slope anyway. But first we have to build the infrastructure: real time surveillance everywhere.
We seem to embark on all kinds of regulatory schemes without the kind of empirical evidence required in the scientific community. Crack cocaine; put everyone in prison forever. A few lenient judges; take away every judges’s discretion.
So anyone who has a contract with the government must engage in costly compliance in order to prosecute or debar a few who commit fraud. But of course, this does not include those bad actors who are too big to debar.
Is there something wrong with this picture of is it me. I am not a libertarian. I believe in strong regulation of food and drugs and the environment. But there seems to me to be a systemic lack of common sense going around.
Jon
Jon