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"Government Contractors Face New Compliance Hurdles," by William R. Hinchman

02.01.08

Clients that perform services for the federal government are keenly aware of the procedural hurdles they must overcome to compete for the billions of dollars of government contracts that are awarded each year.  Now government contractors will have another hurdle to clear in order to be eligible to perform services for the federal government.  Proposed by the Civilian Agency Acquisition Council and the Defense Acquisition Regulatory Council, Subpart 3.10, entitled “Contractor Code of Business Ethics and Conduct” has been added to the Federal Acquisition Regulation (FAR).

Subpart 3.10 creates a two-step compliance process for any contractor that is awarded a contract that exceeds $5 million with a performance period of 120 days or more.  The first obligation, within 30 days of contract award, is to implement and distribute to all employees an ethics and business code of conduct.  Second, within 90 days of award, the contractor must have in place an employee ethics and compliance training program and an internal control system.  The new requirements do not apply to contractors that have been awarded contracts for commercial items pursuant to FAR Part 12.

During a time when clients continue to struggle with the compliance requirements of the Sarbanes-Oxley Act, many will wonder why the government is imposing another set of compliance requirements on businesses.  In part, the requirements are intended to address the fraudulent contracting practices that have been reported during the war in Iraq.  The intent of the added obligations, imposed by Subpart 3.10, is to put in place checks and balances in the federal contracting process, so as to timely discover improper conduct and to implement corrective measures.  There are no set processes and procedures that each and every program must have, rather the programs should be tailored to the nature of the client’s business and the extent of government contract work that is being done.  The internal controls and oversight requirements are to be constantly monitored and, where necessary, modified by the contractor.

Many advisers are recommending to clients to meet these new requirements by adopting programs that comply with the criteria as set out in the U.S. Sentencing Guidelines.  Generally, the Guidelines state, “To have an effective compliance and ethics program . . . an organization shall . . . exercise due diligence to prevent and detect criminal conduct, and otherwise promote an organizational culture that encourages ethical compliance with the law.”  Some of the elements considered in the Guidelines for a program to be effective are (a) whether a high level person within the company is responsible for the program, (b) if adequate resources have been dedicated to the program and (c) if all employees are familiar with the program.

For clients, the failure to put in place and adhere to the requirements of Subpart 3.10 can be disastrous.  Failure to implement the new requirements may result in termination of the awarded contract.  If allegations of fraud should ever be leveled against your client and the client did not have in place the Subpart 3.10 requirements, there is an increased likelihood of criminal prosecution, prison sentences, fines and restitution orders.  Further, should your client ever face litigation brought pursuant to the Civil False Claims Act, your client may face treble damages and debarment from federal contracting.  While not a shield to these actions, the existence of a Subpart 3.10 program may be used as evidence of management’s commitment to fight fraud and mitigate the draconian penalties that a client faces in these matters.

If your client competes for federal contracts that meet the minimum requirements laid out in Subpart 3.10, it is recommended that they begin to put in place an ethics and business conduct program now.  If your client already has such programs, it is equally important that they review their existing programs to determine if they are compliant.  Given the short compliance periods and the broad scope of the programs that will need to be in place, it is essential that clients plan in advance and develop such programs prior to bidding on and being awarded a federal contract.