May 2014

Debarment: Not Just a Contractor's Concern

Debarment: Not Just a Contractor's Concern

Mention the word "debarment" to federal contractors, and you might get some strong reactions. For those readers lucky enough not to have first-hand experience, debarment is the exclusion of a party from participation in federal procurement contracts or other covered transactions. Companies whose federal government sales comprise a large portion of their overall business have long considered debarment a death sentence without due process. However, if your company's business relies upon federal transactions or agreements (including leases, permits, and grants), you should share their dread. In response to congressional pressure, agencies are more aggressively using their debarment powers. For instance, in fiscal year (FY) 2011, the Environmental Protection Agency (EPA) initiated 98 proposed debarments, and imposed 111 suspensions, 115 discretionary debarments, and 42 statutory debarment actions under the Clean Air Act and Clean Water Act.

Many seasoned attorneys are shocked when they learn about the rules and application of debarment. The goal of debarment is to ensure that federal tax dollars are spent responsibly. In the procurement context, this means that contracts should only be awarded to responsible parties; with regard to environmental statutes, the goal is to ensure that federal funds are spent and public resources are allocated in a manner that improves (or at least is not detrimental to) environmental quality. To implement this policy, the federal government keeps a list of excluded parties (aptly named the "Excluded Parties List"), and all contracting officers or entities entering into agreements (contracts, grants, loan guarantees, leases, etc.) with the federal government must check that list before signing any new contract or agreement. If an entity is included on this list, it cannot be party to a government contract or transaction during the term of its debarment or suspension.

There are a few aspects of debarment that make its application particularly onerous.

  1. According to regulation and case law, debarment is not a form of punishment. This means that it is administered separate from and in addition to any civil or criminal penalties. For example, a party could either be convicted of a crime or enter into a plea agreement regarding violations with the Department of Justice, and then be subject to a debarment proceeding a year later for the same violations.
  2. Discretionary debarment is imputed throughout a family of companies and through employees. This means that a federal agency may impute conduct (a) from an individual to an organization; (b) from an organization to an individual; (c) between individuals; and/or (d) from one organization to its affiliate organization.
  3. Discretionary debarment applies government-wide, and the procurement and nonprocurement discretionary debarments are reciprocal. For example, an entity's exclusion by the Environmental Protection Agency would have the effect of precluding that entity (and others to which and whom the exclusion was imputed) from participating in federal leases with the Department of the Interior.
  4. Discretionary debarments flow down and up, meaning that an excluded party is prohibited from participation in all "covered transactions," which include any primary transaction with a federal agency and, depending upon the agency, some or all of any lower tier transactions. This includes any grant, loan, agreement, or lease or subcontract under those agreements.

If there is any risk that you may run afoul of the Clean Water Act (CWA), or any federal statute, you might be interested in knowing more about what debarment is, and more importantly, how you can avoid its consequences.

1. Deciphering the Types of Debarment

Debarments are initiated and decided at the agency level, and agencies can coordinate and collaborate in debarment proceedings, but a single agency will take the lead. Two sets of debarment regulations (i.e., procurement rules are set forth in Federal Acquisition Regulations (FAR) part 9.4 and nonprocurement rules set forth in 2 C.F.R. part 180, also referred to as the "Common Rule"), are used throughout the entire federal government, but many agencies have their own supplementary debarment rules.

There are two types of exclusion: (1) suspension, which is a temporary interim action to exclude a party from participation in a government procurement or covered transaction pending a final decision regarding an exclusion for a definite period of time; and (2) debarment, which means that after a finding of cause for debarment, an agency places the entity on the excluded parties list for a definite period of time.

Debarments can be either mandated by statute or be discretionary. Under statutory debarment, an entity is required to be placed on the excluded parties list under the terms set forth in the law, whereas discretionary debarment results from an agency's review of the facts and circumstances relating to a cause for debarment. Statutory debarments (such as those mandated by the CWA) often have a restricted application, whereas discretionary debarments apply government-wide. Discretionary debarments are reciprocal among agencies, meaning that no agency can enter into a transaction with an excluded party, even if the party was debarred by a different agency and under a different rule. The agency-specific rules would apply to entities seeking to participate in a covered transaction with a particular agency.

Discretionary debarments are governed by two regulatory schemes, one for procurement (48 C.F.R. subpt. 9.4), and a separate set of rules for nonprocurement (2 C.F.R. pt. 180). These rules are reciprocal; a party debarred under the nonprocurement rules would also be an excluded party for purposes of the procurement debarment system. In general, the rules applied to a debarment action depend upon the type of agreement involved with the violation. Procurement debarment is applied for procurement contract actions, including purchase orders under existing contracts, whereas nonprocurement debarment applies to a "covered transaction." What constitutes a covered transaction is defined through a series of provisions in the Common Rule, and some agencyspecific rules broaden this definition. The regulations provide that "all nonprocurement transactions . . . are covered transactions unless listed in the exemptions under § 180.215." The definition of nonprocurement transactions in 2 C.F.R. part 180 is written broadly, and encompasses "any transaction, regardless of type (except procurement contracts)."

2. Agency Discretion in Applying Debarment Rules

Agencies have a high level of discretion when it comes to the nonprocurement debarment process. For instance, the Department of the Interior's (DOI) specific debarment regulations, which would apply to many of the approvals and leases required to conduct business on federal lands, provide that the following are nonprocurement transactions: (a) federal acquisition of a leasehold interest or any other interest in real property; (b) concession contracts; (c) disposition of federal real and personal property and natural resources; and (d) any other nonprocurement transactions between DOI and a person. Therefore, unless exempted, any transaction with a federal agency or that requires the approval of a federal agency would be considered a covered transaction.

The nonprocurement rules identify a number of specific causes for debarment, such as fraud, antitrust violations, false claims, tax evasion, theft, lack of business honesty, lack of performance, or violation of terms to a public agreement. Violations of environmental statutes have been held to demonstrate lack of "business integrity" or "business honesty," meaning that even without the CWA's statutory debarment provision, EPA could use a CWA violation to bring a debarment action. Additionally, the nonprocurement debarment rule also includes a broad catchall cause for debarment: "any other cause of so serious or compelling a nature that it affects your present responsibility."

Although the nonprocurement rules provide that the agency has the burden of establishing the cause for debarment, the rules also state that the agency has met its burden when the debarment action is based upon a conviction or civil judgment. Making matters worse, the nonprocurement rule's definition of conviction is broad, and includes misdemeanors. Once the government has established the cause for debarment, the burden shifts to a respondent to persuasively rebut the evidence establishing the cause for debarment and to demonstrate his/her present responsibility.

3. Understanding the Application of Debarment for Clean Water Act Violations

Under the authority of section 508 of the CWA (33 U.S.C. § 1368), the EPA places entities (or persons) convicted for certain CWA offenses (see 33 U.S.C. § 1319(c)) on the excluded parties list, rendering them ineligible to contract with any federal agency for any procurement with a violating facility. Note that the CWA's provision is limited in that it focuses on the owner of the facility where the CWA violation occurred and procurement contracts with that facility. This prohibition remains in effect until EPA certifies that the condition giving rise to such conviction has been corrected. By itself, the CWA statutory debarment provision is not particularly troubling for those companies who do not contract with the federal government at the violating facility. However, EPA's regulations implementing the CWA expand the prohibition further by disqualifying those convicted of a section 1319(c) violation from any subcontract, assistance, sub-assistance, loan, or other nonprocurement benefit or transaction where the violator performs any part of the transaction or award at the violating facility and the violator owns, leases, or supervises the violating facility. See 2 C.F.R. § 1532.1110. Making matters worse for those convicted of a CWA violation, EPA often exercises its discretionary debarment authority on top of the statutory debarment obligation to exclude the convicted entity from all covered transactions.

EPA prides itself on its "robust suspension and debarment program," and EPA considers its vigorous exercise of its suspension and debarment authority an important aspect of its duty to protect the agency's business interests by ensuring that nonresponsible entities do not receive the taxpayers' money. According to the most recent report by the Interagency Suspension and Debarment Committee (issued on Sept. 18, 2012, covering FY 2011), only three agencies (the Department of Defense, the Office of Personnel Management, and the Department of Homeland Security) issued more debarment-related actions than EPA. Additionally, EPA entered into three administrative agreements, which are akin to settlement agreements and generally require compliance monitoring.

4. The Takeaway: Don't Be Complacent

If you anticipate ever entering into any relationship with the federal government, there are steps that you can take to insulate yourself from the dangers of debarment. In reality, there is no way that you can eliminate the risk of an employee violating a regulation, but taking steps to increase awareness and vigilance demonstrates that you are doing everything that you can to decrease the likelihood of violations within or attributable to your company or its employees. By implementing comprehensive environmental and safety guidelines internally, you will create awareness around these issues and provide a path for employees finding themselves in a difficult situation. Having a companywide ethics program supported by management further demonstrates your company's commitment to compliance with all laws governing your business. Add in an anonymous hotline where employees can report incidents of noncompliance and you are well on your way to creating a solid program that fosters compliant behavior and creates avenues for dealing with issues.

Because we are human, there will be mistakes. Many times, these mistakes result from the unauthorized actions of employees or contractors. Nonetheless, these acts can lead to a debarment throughout the entire company. If your company does find itself part of an enforcement action, the existence of a solid compliance program will be the cornerstone for your case that you are a responsible party and should not be debarred. A culture of sweeping incidents under the rug will send the message that your company does not learn from its mistakes, and will further the agency's fears that your company cannot be trusted. On the other hand, if you can demonstrate that your compliance polices are current and responsive, and you can show that compliance permeates the culture of your company, you are more likely to foster a collaborative environment with debarment officials. This is the only way to work toward an administrative agreement, which is an outcome much better than debarment.

For More Information Contact:
Victoria L. Strohmeyer
Phone: 202-654-6924
Email: vlstrohmeyer@hollandhart.com

Lauren R. Caplan
Phone: 202-654-6919
Email: lrcaplan@hollandhart.com

Originally published in Water Resources Committee Newsletter, Volume 16, Number 2, May 2014. © 2014 by the American Bar Association.

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