New regulation sets mandatory ethics standards for government contractors

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Recent revelations concerning contractor and government misconduct in the federal contracting sector culminated recently in the adoption of strict new ethics rules. The rules mandate the adoption of a Code of Business Ethics for most companies doing business with the federal government.
Effective Dec. 24, 2007, all federal government contractors must have a written Code of Business Ethics and Conduct and a corresponding awareness program and internal control system within 30 days of award of a covered contract.
The regulation specifies that a contractor’s internal control system must facilitate the timely discovery of improper conduct in connection with government contracts and ensure corrective measures are promptly instituted and carried out. The regulation also encourages employee reporting of misconduct by requiring contractors to prominently display “agency fraud hotline posters” in common work areas.
The rules do not apply to contracts valued at less than $5 million, to commercial item contracts, to contracts that are to be performed wholly outside the United States or to contracts that will be completed within 120 days. Small businesses only will be required to have a Code of Ethics and not an awareness or compliance program.
Finally, the provisions of this new rule must be flowed down to all subcontracts that do not fit within one of the exceptions noted above.
Absent from the rules were several suggestions intended to put teeth into the ethics code requirements that were deferred for later consideration. The government has proposed implementation of these deferred items in a revised set of rules that, if adopted, would significantly amend the regulation to more closely resemble standards contained in Chapter Eight of the Federal Sentencing Guidelines.
Like the new rules already in effect, the proposed rules require federal government contractors to have a written Code of Business Ethics and Conduct and a corresponding awareness program and internal control system.
The proposed rules do not apply to contracts valued at less than $5 million, to commercial item contracts, to contracts that are to be performed wholly outside the United States or to contracts that will be completed within 120 days — and small businesses will only be required to have a Code of Ethics and not a training or compliance program.
However, unlike the new rules, the proposed rules also specify several minimum standards contractors must implement to achieve compliance.
Under the proposed rules, contractors must implement an awareness program that communicates the standards and procedures of the compliance program to employees through periodic training and dissemination of information.
Additionally, the contractor’s internal control system must assign responsibility for the program at a level of the organization high enough to ensure the effectiveness of the program; conduct periodic reviews of company business practices, policies and internal controls for compliance with the program; implement an internal reporting mechanism which allows for anonymity or confidentiality; provide for disciplinary action against employees for improper conduct or failing to prevent or detect improper conduct; provide for timely reporting of reasonably suspected violations of the law to the government; and required full cooperation with government audits, investigations and corrective actions.
Additionally, the proposed rules may require contractors to exclude individuals from their organizations on the basis of prior violations of the law or unethical conduct. Finally, the proposed rules also provide for debarment or suspension if a contractor knowingly fails to disclose an overpayment on a government contract or violations of law in connection with the award or performance of a government contract.
Although the proposed revisions have not yet become final, they stand an excellent chance of adoption given the current procurement climate in the United States. In addition, while there is currently no mandatory reporting requirement for known contractual misconduct, the Federal Sentencing Guidelines mentioned above provide a strong incentive to do so.
In this regard, a government contractor cannot shield itself from the actions of a rogue employee. If the employee’s actions were within the scope of his or her employment and intended in any way to benefit the company, then corporate liability will attach.
To avoid possible suspension and debarment or prosecution, contractors doing business with the federal government must implement a Code of Business Ethics and Conduct, as well as an awareness program and internal control system, that complies with the government’s new ethics policies.
Employees and managers alike must be educated about the pitfalls inherent in this new program, and if a violation occurs, they must be ready to demonstrate to the government that a strong program to detect and correct misconduct was in place at the time of the violation.
Charles R. Lucy is Of Counsel for Holland & Hart LLP. He can be reached at clucy@hollandhart.com.