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by Charles Lucy and Craig Willis
On November 12, 2008 the FAR Council issued its long-awaited Final Rule aimed at curtailing contractor misconduct in the federal procurement sector. The Final Rule becomes effective on December 12, 2008, and implements “The Close the Contractor Fraud Loophole Act” (Pub. L. 110—252, Title VI, Chapter 1), as well as adding additional, significant agency requirements. As anticipated, the Rule includes detailed regulations intended not only to provide more ethics guidance to contractors doing business with the Government, but also to provide for greater accountability in the federal procurement process. Among other things, the Final Rule provides a new ground for contractor debarment or suspension and also creates an affirmative duty for many contractors to disclose certain types of conduct to the Government. The Final Rule also provides minimum business conduct requirements that many Contractors will have to maintain in order to do business with the Federal Government.
The Final Rule sets out standards that are applicable primarily to contracts expected to exceed $5 million and take longer than 120 days to perform. However, it is crucial to recognize that the Final Rule also creates a new ground for suspension or debarment of any contractor, regardless of the expected cost or duration of the contract, whether the contractor is big or small, whether the contract is for commercial items, or whether the contract is to be performed overseas. §§ 9.406-2, 9.407-2 and 3.1003(a) (as amended by Final Rule). Specifically, any contractor may be suspended or debarred if that contractor’s principal, as broadly defined by the Rule, knowingly fails to timely disclose credible evidence of significant overpayments on the contract or a violation of: (1) Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code; or (2) the Civil False Claims Act (31 U.S.C. §§ 3729—3733). FAR §§ 9.406-2 and 9.407-2 (as amended by Final Rule).
The Final Rule also sets out a number of requirements contained in a heavily revised version of FAR § 52.203.-13. As mentioned above, Section 52.203-13, and the requirements provided therein, applies only to contracts and subcontracts expected to exceed $5 million and take longer than 120 days to perform. Under Section 52.203-13(b)(1), all covered contractors must have a written code of business ethics and conduct and make a copy of the code available to each employee who is performing the contract. Section 52.203-13(b)(2) provides that contractors must “exercise due diligence to prevent and detect criminal conduct and otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.” Section 52.203-13(b)(3) creates an affirmative duty to disclose certain conduct to the agency Office of the Inspector General (“OIG”). Specifically, the contractor must timely disclose conduct occurring in connection with the performance of the contract, or a subcontract thereunder, that the contractor has credible evidence to believe constitutes a violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code, as well as violations of the False Claims Act.
With the exception of small businesses or contracts for commercial items only, Section 52.203-13(c) provides that all covered contractors must create and implement a Business Ethics Awareness and Compliance Program and Internal Control System. The purpose of the Internal Control System is to establish standards and procedures to facilitate timely discovery of improper conduct and ensure corrective measures are promptly carried out. FAR § 52.203-13(c)(2)(i) (as amended by Final Rule). The Final Rule specifies a number of minimum standards with which the Internal Control System must comply, including the provision of an anonymous or confidential internal reporting mechanism, full cooperation with any Government investigations, audits, or corrective actions, as well as a reiteration of the duty to disclose as discussed above. FAR § 52.23-13(c)(ii).
Although many of the Final Rule requirements appear to be clear cut, several questions regarding the application of certain provisions of the Rule remain unsettled. For example, some ambiguity exists regarding how the Final Rule interacts with the requirement to disclose misconduct that occurred prior to the effective date of the Final Rule. In the Supplementary Information to the Final Rule, the FAR Council draws a distinction between the disclosure requirement as set out in Sections 52.203-13(b)(3), 52.203-13(c)(2)(ii)(F), 9.406-2, and 9.407-2. On the one hand, the Council provides that “the contract clause direct requirement for contractor disclosure” (assumedly Section 52.213-13(b)) applies only to contracts containing the clause, which implies a prospective application. On the other hand, the Council asserts that “disclosure under the internal control system or as a potential cause for suspension/debarment” relates back to misconduct that occurred prior to the effective date of the Final Rule, although not as far back as 20 years, which implies a retroactive application. The Final Rule, as adopted, provides that the mandatory disclosure obligation with respect to reportable misconduct in connection with the award, performance, or closeout of a government contract continues until three years after final payment on that contract. In essence, the FAR Council crafted a rule that is both prospective and retroactive, encompassing all reportable conduct for existing contracts and extending the reporting obligation for three years after the contract ends.
The Final Rule also signifies a major shift between the current “voluntary disclosure” rule contained in the DFARS and the new “mandatory disclosure” rule applicable to all federal agency contracts. However, it is somewhat unclear when the duty to disclose certain types of conduct to the Government arises, nor does the Final Rule define the concept of “timely disclosure.” Interestingly, although the Final Rule provides that disclosure is required only where a contractor has “credible evidence” that certain conduct has occurred, what constitutes “credible evidence” is not defined, and the FAR Council offers only that “this term indicates a higher standard” than “reasonable grounds.” In a similar vein, the new rule does not address what a “significant” overpayment means under the suspension/debarment rules.
The Final Rule is far-reaching and will undoubtedly affect all contractors doing business with the Federal Government in significant ways. However, given the many questions like those briefly discussed above that remain unsettled, the final impact will likely be left to individual agency interpretation. However, one conclusion appears inescapable: the landscape of federal procurement has shifted dramatically, increasing the risk to all government contractors.
Please contact Holland & Hart attorneys Charles Lucy, John Scorsine, or Craig Willis with any questions you may have regarding the Final Rule decision. | 
