The new FAR rules require mandatory disclosure in writing to the DOD Inspector General and to the Contracting Officer of all “credible evidence” related to an award, performance, or close out of a government contract if one of their principals, employees, agents or subcontractors committed: (1) violations of criminal law involving fraud, conflict of interest, or bribery or gratuity found in title 18 of the United States Code;  (2) violations of the civil False Claims Act^[7]; or  (3) significant overpayments.^[8]   

The “credible evidence standard” generated a lot of discussion, particularly because of what threshold level of information is required before disclosure is required.  Is one uncorroborated tip enough? How high is the burden of proof? Of course a company must conduct its own investigation. As one panelist noted, many internal reports are unsubstantiated that result in false positives.  

The new FAR rules require full cooperation and disclosure and corrective actions once contractors are aware of such misconduct.  Thankfully, a company nor its employees do not surrender their constitutional rights such as attorney-client privilege as a result of disclosure:  “Nothing in this rule is intended to require that a contractor waive its attorney-client privilege, or that any officer, director, owner or employee of the contractor, including a sole proprietor, waive his or her attorney client privilege or Fifth Amendment rights.”^[9] 

Subcontractors should take note:  Contractors must flow-down these requirements to subcontractors who are performing contracts above $5 million and a performance period of 120 days unless the acquisition is for a commercial item or is performed entirely outside the United States^.[10] Subcontractors are required to disclose these requirements directly to the government as opposed to the prime contractor and are subject to the same penalties. ^[11]  

Code of Business Ethics and Conduct 

            The new FAR rules contractors and subcontractors performing certain federal contracts to:  (i) have a written code of business ethics and conduct;  (ii) provide a copy of the code to each employee;  (iii) institute an accompanying compliance training program; and (iv) display anti-fraud hotline posters in common work areas and worksites. ^[12] All contractors, including small business and commercial item contractors and those performing outside the United States are required to have a written code of Business Ethics and Conduct within 30 days of an award and are to furnish a copy of the code to each employee engaged in the performance of the contract.^[13]     

Business Ethics Awareness & Compliance Program and Internal Control System 

            Contractors, other than small business and commercial item contractors will need to establish standards and procedures to facilitate the timely discovery of credible evidence of violations of federal criminal law or overpayments from the government and provide corrective action.  Internal reporting procedures, hotlines for which suspected instances of misconduct without fear of retaliation and internal help to allow employees to obtain guidance is required.^[14] 

Distinguished speakers 

Lynn McCormick, the Program Manager with DOD Office of Inspector General discussed the reporting procedures. The DOD website includes an electronic DOD Contractor Disclosure Program for online submission.^[15] The purpose of the Contractor Disclosure Program is to afford contractors a means of reporting certain violations of criminal law, violations of the civil False Claims Act, or significant overpayments discovered during self-policing activities; provide a framework for government verification of the matters disclosed; and provide an additional means for a coordinated evaluation of administrative, civil, and criminal actions appropriate to the situation.  

McCormick said that while the initial contact is made from the DOD IG, the company is to make their own internal investigation. You can notify regarding a matter while investigating it. DOD IG will contact you after 30 days. She said to disclose early and disclose plainly, that the goal is to get it on paper. She said that the government will put the money back into the contract and then move on. 

One panelist mentioned that his company had policies and procedures in place for years and that there was no need for a mandatory disclosure rule. He said that there exists a culture of over disclosure, not under disclosure. Further, the vast majority of reports are not substantiated once they are vetted, tracked and logged. False positives are determined and then true positives are rectified internally. He believed that the kind of record keeping will be different under the new mandatory rules.   

Shortly after the new rules went into effect many organizations such as the NDIA,^[16] National Contract Management Association,^[17] Information Technology Association of America,^[18] Fairfax Chamber of Commerce,^[19] the Judicial Review,^[20] American Health Lawyers Association ^[21] issued their advisories as did numerous law firms. The web is filled with such information and alerts.  

After more than three months in effect, if you have questions or would like to share information that would be helpful to the chapter members regarding the new rules, compliance or business ethics, awareness and internal control systems and implementation, please contact the chapter, we would be interested in hearing from you regarding your efforts in complying and implementing the new rules.  

Release Date: March 23, 2009

For more information - See Latham & Watkins:

December 2008 Changes to the FAR Regarding Codes of Business Ethics, Internal Controls, and Mandatory Disclosure