Recent revelations concerning contractor and government misconduct in the federal sector culminated recently in the adoption of strict new rules mandating the adoption of a Code of Business Ethics for most companies doing business with the federal government. Effective December 24, 2007, all federal government contractors must have a written code of business ethics and conduct and a corresponding training 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 new 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 will only be required to have a Code of Ethics and not a training 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 above.

Absent from the new rule were several suggestions intended to put teeth into the ethics code requirements that were deferred for later consideration. The Government has now proposed implementation of these deferred items in a revised rule that, if adopted, would significantly amend the regulation in the near future to more closely resemble standards contained in Chapter Eight of the Federal Sentencing Guidelines. For example, the proposed revisions require contractors to timely report any conduct in connection with the award or performance of any contract to the government when the contractor has reasonable grounds to believe that a violation of federal criminal law has occurred. The proposed revision also specifies several minimum standards necessary for compliance with the rule and provides for suspension and debarment if a contractor fails to comply.

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 no current 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 on 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. Holland & Hart is uniquely positioned to provide the proactive advice and assistance necessary to meet the demands of this new government program. If you have any questions or need further information, please contact Charles Lucy or John Scorsine in our Colorado Springs, CO office or our White Collar Practice Group, and they will be happy to assist you.