This article is for your personal information only and is not intended as legal advice. This area of the law is very complex. Every case is different and the information contained herein is general. This information is not intended to be legal advice. Nor is this material intended to replace consultation with a professional. Always consult a licensed attorney for your particular case. Nothing herein shall create an attorney/client relationship.
Q. The New Business Ethics And Compliance Rules For Contractors
A. There has been much discussion lately about the recent changes in the Federal Acquisition Regulation (the “FAR”) which require contractors to implement a code of conduct and compliance training. This addresses commonly asked questions about what these changes are, how they impact companies doing business with the government, and how to comply. As discussed below, government contractors should view this change as a unique opportunity to ultimately decrease costs and increase revenues.
Q. What are the recent changes to the FAR?
A. The changes to the FAR, effective December 24, 2007, were enacted to promote the requirement in the wake of recent procurement scandals that contractors conduct themselves with the highest degree of integrity and honesty. In sum, the new rules require establishing (1) a written Code of Business Ethics and Conduct, and (2) an Employee Business Ethics and Compliance Training Program and internal control system, for companies having a contract with a value exceeding $5 million and performance period of 120 days or more. This applies to primes as well as subs.
Q. Are there any exceptions recognized for government contractors?
A. Although these rules do not presently cover contracts solely for commercial items, or for work performed entirely outside of the United States, these limited exclusions are probably going to be eliminated later this year under proposed additional changes to the FAR which are likely to come into effect in a few months. Creating a code and training program is not as difficult or expensive one might think, and can be effectively implemented with the help of a law firm that can also perform a risk assessment in a manner that can have the results of that review protected by attorney-client privilege. This aspect of implementation is further discussed below.
Q. How do these changes help me?
A. There are several reasons why embracing these changes is good for business. It of course helps your company comply with the new requirements, which in turn can help avoid sanctions down the road and demonstrate to the government that the company should be provided leniency on infractions, due to a culture of compliance. Under the so-called “McNulty Factors,” companies undergoing scrutiny by the government for a potential infraction may receive a more favorable conclusion to the problem since the government can view such programs as demonstrating a good-faith culture of compliance if done properly. Improved internal controls on reporting will also help the company drive notice of problems to management to enable effective responses rather than driving complaints outside to IG’s and other officials. Given such examples, it should become apparent that compliance is ultimately more cost-effective than non-compliance. Additionally, implementing these changes can bolster your competitive advantage by staying ahead of the competition and demonstrating to the government as well as your teaming partners that you are fully compliant with the new changes in the law. Demonstrating compliance and a polished approach to your internal controls can also help augment your marketability to your teaming partners to obtain more work and grow revenues. The resultant improvement in risk management procedures will also help to decrease violations and reduce operational costs. Polishing your internal controls and adopting a strong code and program can also help to enhance the valuation of your company.
Q. What happens if I don’t do it?
A. There are significant risks associated with not following these changes as they apply to your business. You face not be compliant with federal law, and would therefore not be the beneficiary of the more lenient treatment your company would otherwise be positioned to request if it adopted these rules to demonstrate a culture of compliance to the government. The disciplinary impact from such problems could result in increased risk of suspension or debarment for the company as well as individual employees. You also risk losing out on lucrative contract opportunities due to noncompliance since you need to follow these rules on contracts with a value exceeding $5 million and performance period of 120 days or more. Also, your competitors in the marketplace which are compliant with these changes in the FAR will have a competitive leg up on you if you don’t have the program in place.
Q. How do I implement these changes?
A. A basic two step plan with the assistance of counsel, which involves an initial risk assessment and compliance review, and an implementation and training program, will get you well on your way to achieving compliance. In the first step, the firm assisting with compliance would for example assess your current baseline by reviewing existing policies and procedures; interviewing management and assess current issues; confirming pending contracts and invoicing procedures; determine how problems come to the company’s attention and how they are handled when they arise; and confirm reporting and human resource procedures. The initial assessment and discussion with management leads to the preparation of the Code of Business Ethics and Conduct. In the second step, the firm helps set up and implement the new training program, which the FAR views as necessary to “promote compliance.” As part of that process, it is important to set up a reliable and updated internal control system, to include important elements such as an ethics hotline and fraud hotline poster. Training of staff should be completed on site with a comprehensive training manual covering all pertinent topics. The manual and training should be updated bi-annually. Management needs to be involved in this process from start to finish.
Q. What are the potential benefits of using a law firm to implement this?
A. The initial risk assessment and compliance review can be conducted by legal counsel, which could be very useful since certain communications may be protected by attorney-client privilege if sensitive issues or problems arise during the initial process and review. Taking steps to preserve the attorney-client privilege may provide an increased degree of comfort to companies undergoing this process. Also, the firm through its compliance counsel can help represent the company with the government and assist on negotiation and related issues as they arise. The company should consider retaining counsel to help implement this program.
Q. Can Albo & Oblon help me with this process?
A. Yes. The firm has a program in place to help companies implement these changes and adopt a customized Code of Business Ethics and Employee Compliance Training Program. Our team of experienced government contract attorneys assisting on this process includes John Polk, the former Director of Fraud Remedies for the Department of the Air Force. Mr. Polk is also a former Assistant United States Attorney and has significant experience addressing such compliance matters. The government contracts team at our firm also includes Terry O’Connor, who teaches government contracts law nationally and has written several books on the topic. The Firm’s legal staff also includes seven former prosecutors who can join and assist in addressing white-collar issues. You can contact the firm to discuss this and explore how we can assist with these changes in the rules and any related issues impacting your business.
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