This is the final part of a three-part article discussing contractor compliance programs. Part I examined why compliance programs are necessary and identified the three basic elements of a contract compliance program: (1) a code of business ethics and conduct, (2) internal controls, and (3) mandatory disclosure requirements. Part I went on to discuss codes of business ethics and conduct. Part II addressed the internal controls requirement. This third part looks at mandatory disclosure requirements.
Mandatory Disclosure Requirements
Like the other elements of a contractor compliance program, mandatory disclosure requirements arise from a final ruling amending the FAR jointly issued by the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council effective December 12, 2008. Mandatory disclosure requirements appear in three places in this final ruling. The first two mandatory disclosure requirements are included in the revisions to FAR 52.203-13 entitled “Contractor Code of Business Ethics and Conduct.” As discussed in Part I, among other things, this clause requires contractors to adopt a code of business ethics. This code must include mandatory disclosure. Contractors shall timely disclose, in writing, to the agency Office of the Inspector General, with a copy to the contracting officer, whenever, in connection with the award, performance or closeout of the contract or any subcontract thereunder, the contractor has credible evidence that a principal, employee, agent or subcontractor of the contractor has committed (a) a violation of federal criminal law involving fraud, conflict of interest, bribery or gratuity violations or (b) a violation of the civil False Claims Act (FCA). FAR 52.203-13(b)(3)(i). This provision further recites that the government will safeguard and treat information obtained pursuant to the contractor’s disclosure as confidential where the information has been marked “confidential” or “proprietary” by the company. FAR 52.203-13(b)(3)(ii).
As discussed in Part II of this article, FAR 52.203-13 also requires contractors to implement an internal control system. This system must include mandatory disclosure. The mandatory disclosure provision to be included in the internal control system is the same requirement that is to be included in the code of business ethics and conduct. FAR 52.203-13(2) (i)(F). The internal control system must further provide that the disclosure requirement continues until at least three years after final payment on the contract. Id.
The third place where mandatory disclosure requirements appear in the final ruling is with respect to suspension and debarment. The final ruling revises FAR 3.1003(a)(2) entitled “Contractor requirements” to state that a contractor may be suspended and/or debarred for knowing failure by a principal to timely disclose to the government, in connection with the award, performance, or closeout of a government contract performed by the contractor or a “subcontract awarded thereunder”; credible evidence of a violation of federal criminal law involving fraud, conflict of interest, bribery or gratuity violations; or a violation of the civil FCA. FAR 3.1003(a)(3) goes on to recite that a contractor may be suspended and/or debarred for knowing failure by a principal to timely disclose credible evidence of a significant overpayment, other than overpayments resulting from contract financing payments. Knowing failure to timely disclose credible evidence of any of the above violations remains a cause for suspension and/or debarment until three years after final payment on the contract.
Failure to comply with this same mandatory disclosure requirement is also cause for debarment or suspension pursuant to FAR 9.406-2 entitled “Causes for debarment” and FAR 9.407-2 entitled “Causes for suspension.” Unlike the mandatory disclosure requirement in FAR 52.203-13(b) & (c), the mandatory disclosure requirements concerning debarment and suspension apply to all government contractors regardless of whether they are large or small. Thus, small businesses are also subject to mandatory disclosure requirements even if they are not performing large contracts.
Clarification of Mandatory Disclosure Requirements
Since the Councils issued their final ruling in 2008, there has been little case law construing the mandatory disclosure requirements. To clarify what these requirements mean in practice, it is necessary to rely substantially on the comments made by the Councils in their final ruling.
Credible evidence: The key determination in deciding whether there is an obligation to make a mandatory disclosure is what constitutes “credible evidence.” According to the Councils, this term indicates a higher standard than reasonable grounds to believe, implying that the contractor will have the opportunity to take some time for a preliminary examination of the evidence to determine its credibility before deciding to disclose to the government.
Level of employee: The FAR does not define the level of employee whose knowledge would trigger the duty to make mandatory disclosures. Rather than directly address this issue, the Councils’ approach seems to be that if a contractor has an effective compliance program, information that might be the subject of mandatory disclosure will come to the attention of senior management.
Timely disclosure: Another question that arises is what constitutes a timely disclosure. The Councils note in their final ruling that they considered and rejected providing for a defined period of time. Instead, the Councils state that using the standard of “credible evidence” helps clarify what constitutes timely disclosure because it implies that the contractor will have the opportunity for preliminary examination of the evidence to determine its credibility before deciding to disclose to the government.
Exposure to qui tam claims: In their final ruling, the Councils state that they recognize that mandatory disclosure of a violation of the civil FCA presents a risk that a qui tam claim will follow. The Councils do not, however, consider this a valid excuse for failing to make disclosures. Rather, the Councils recite that timely disclosure of a knowing violation offers the contractor an opportunity to demonstrate its responsibility, to avoid suspension or debarment and to obtain a reduction in damages under the FCA.
Violation of civil FCA: One of the subjects of mandatory disclosure is evidence of a violation of the civil FCA. Prior to adoption of the final rule, the Councils received criticisms of the interim rule to the effect that the requirements of the civil FCA cannot be reasonably ascertained and understood by contractors. The Councils disagreed with these criticisms and responded that contractors doing business with the government are expected to take appropriate steps to assure their compliance with the FCA and all other applicable rules. The Councils go on to note that a significant body of case law interpreting the civil FCA has developed for contractors to analyze in interpreting the statute.
Significant overpayment: The mandatory disclosure requirement in the FAR provisions addressing causes for suspension or debarment require mandatory disclosure of significant overpayments on the contract other than overpayment resulting from contract financing payments. In their comments on the final rule, the Councils state that it is appropriate to limit the application of this disclosure requirement to situations in which the unreported overpayment is significant. The provision is not intended to apply to routine contract payment issues. Whether or not an overpayment is significant depends on more than just dollar value involved, the circumstances of the overpayment must be considered as well. The disclosure requirement is aimed at the type of overpayment that the contractor knows will result in unjust enrichment and yet fails to disclose it.
Unlike other major elements of a contractor compliance program, adherence to the mandatory disclosure obligation in the FAR requires the contractors to promptly evaluate and possibly report unexpected and unwelcomed information. Contractors must therefore understand their disclosure obligations in advance so they are prepared to respond appropriately when necessary.