Government Raids Contractor

June 16, 2011

In one of my first posts on this blog, I said “the government customer is still the one customer that has its own cadre of policemen and is quite willing to send them after vendors whom they find annoying.”  (http://wp.me/piEZm-3)  Now, undoubtedly to provide an updated confirmation of my platitude, the FBI and IRS CID have raided the offices of a government contractor in Meriden, Connecticut. (http://tinyurl.com/66p2g7w) The contractor was involved in $3.3 billion in military housing contracts with the U.S. Navy in the Pacific Northwest for more than 600 homes; with the U.S. Air Force at bases in Florida, Georgia, Arkansas and Massachusetts, and at a U.S. Army base in Missouri.. Every one of these projects collapsed with deadlines missed and subcontractors suing for payment. Although, as I know from personal experience, the military services aren’t very well staffed to manage the development of privately owned military housing, eventually the compounding contracting disasters brought so much attention that the contractor obviously came to the attention of those government agents who carry guns and they swooped in and carted off boxes of document and computers.

The poor attorney who apparently has been representing the company in its negotiations with the government was not aware of the raid when contacted by a reporter. Naturally, the reporter didn’t hear from the attorney again. I only hope he had learned the rule of legal representation that I was taught while an in-house attorney with GE: the lawyer never goes to jail. Which is to say, advise the client, but don’t participate in the conspiracy.

While this is perhaps an extreme example of a government contract (and possibly a government contractor) gone bad, it is good to remember that for the government contracting officer, the agents with guns are only a phone call away. To be successful in this business, government contractors must have both knowledge and integrity. Either one without the other is a good recipe for one of these surprise visits.


Government Contractors To Be Drafted Into the War on Corporate Misconduct

September 10, 2007

This comes under the category of “I’m from Washington and I’m here to help you.” (Which as I am sure everyone knows is quite a joke outside of the Beltway, along with “The check’s in the mail” and “Sure I’ll respect you in the morning.”) Sometime in the next couple of months, a change in the Federal Acquisition Regulation (FAR) will require Contractors, upon award of a government contract over $5,000,000, to have a code of ethics and business conduct and ethics and compliance training program and internal control systems.

Although technically limited in scope, this anticipated requirement has broader implications for government contractors and, if a compliance program is not already in place, will increase the cost of doing business with the government, especially for small government contractors.

The proposed FAR change would require Contractors, upon award of a contract in excess of $5,000,000, to display the appropriate fraud hotline posters during contract performance at contract work sites in the United States. If the contract is in excess of $5,000,000 and has a period of performance in excess of 120 days, in addition to displaying the posters, Contractors will be required to have a written code of ethics and business conduct within 30 days of contract award. Within 90 days of award, the Contractor would also be required to have in place an employee ethics and compliance training program and appropriate internal control systems “suitable to the size of the company and its involvement in Government contracting.”

This requirement will not apply to contracts for “Commercial Items” (see Part 12 of the FAR) or to contracts performed outside the United States. Flow down to subcontracts over $5,000,000 is also required.

The proposed FAR provisions do not explain what constitutes an acceptable code of ethics and business conduct or an acceptable compliance training program. The Contractor’s internal control system is required to “facilitate” timely discovery and disclosure of improper conduct in connection with Government contracts and to “ensure” that corrective measures are promptly carried out. Examples area given as to what should be included in an internal control system:
(i) periodic review of company business procedures;
(ii) an internal reporting mechanism, such as a hotline;
(iii) appropriate audits;
(iv) disciplinary action;
(v) timely disclosure of any suspected violations; and
(vi) full cooperation with any Government investigations or corrective actions.

Even if the new clause is not included in the contract, the FAR will say that Contractors “should have” a written code of ethics and business conduct and an employee ethics and compliance training program and an internal control system. While this may not be an explicit requirement, the government can award contracts only to “responsible” contractors. (FAR 9.103) To be determined “responsible,” a contractor must have “a satisfactory record of integrity and business ethics.” (FAR 9.104-1) So to not have the code of ethics and business conduct, the training program and the internal control system that the FAR says the contractor “should have,” is an invitation to a contracting office to find the contractor to not be “responsible,” which would provide a basis to not make an award.

Of course, businesses of any significant size should already have an effective compliance system. Under the federal sentencing guidelines for organizations, a corporation can alleviate the harshest aspects of its criminal vulnerability by demonstrating that it has put in place an “effective compliance program.” The organizational guidelines criteria embody broad principles that, taken together, describe a corporate “good citizenship” model. While the guidelines do not offer precise details for implementation, they do provide seven key criteria for establishing an “effective compliance program” and identify three additional factors to be considered. Implementing the principles of the guidelines would be a good place to start in meeting the new government contracting requirements. More detail on the sentencing guidelines may have to be a subject of a future commentary.

Although both the proposed FAR provision and the federal sentencing guidelines recognize that a compliance program has to be tailored to the size, structure, context and market of an organization, it still will involve a significant on-going cost of doing business. However, given the negative impact of corporate malfeasance in marketplace, to say nothing of the legal implications, compliance programs are now an establish feature of the business landscape.


CPR For Government Contractors; What To Do Until The Government Contracts Lawyer Shows Up.

April 26, 2007

It Looks So Good: Because the U.S. Government buys more than $370 billion of goods and services each year, it is an enticing market for many businesses that have done little or no selling to government agencies. The market for state and local government purchases is of the same order of magnitude. Selling to the federal government is lauded (by the government) as being much easier than it used to be (which is true), so many businesses think that government contracts can’t be all that much different than commercial sales. Like many messages from the feds, this one should be taken with a grain of salt. It is true that selling to the government is much easier than it was even a decade ago; however, the differences are still significant and they can trip up and frustrate a business that is not prepared for those differences. So the odds are that sooner or later a client will call you either with a question about getting a government contract or because it is in trouble with a government contract. This commentary addresses what can be done and what should not be done while waiting for the government contracts expert to arrive at the scene of the crisis.

There are two situations that require an immediate response. Although the details are different, these situations arise in state and local government contracting also.

The Dark Side of Government Contracting. The following situations and their implications will come as no surprise to you, but as you know, they will come as a big shock to the client: The government customer has uttered one of those “fighting words” such as “fraud” or “bribery.” Or the client has gotten a call from the FBI or an agency Inspector General or an auditor. Or equally likely, the client has discovered a situation that may be a serious violation of the rules. This may not happen as often as it did when there were so many more ways for a government contractor to screw up, but the government customer is still the one customer that has its own cadre of policemen and is quite willing to send them after vendors whom they find annoying. Government customers are not like commercial customers who resolve disputes mostly by civil litigation (although the government can do that too).

There are still a plethora of federal crimes intended to prevent vendors from taking unfair advantage of a government customer, so it behooves a government contractor to know the rules and follow them. But that is a topic for future commentary. Beyond that, government contractors are often encouraged to make self-disclosures. This is not necessarily advisable, certainly not before a careful investigation of the facts and analysis of the legal implications of those facts. Because of the multitude of potential investigative agencies, government contractors may also be confronted by investigators who can be less than professional with their methods and allegations. Government contracting is still subject to technical and convoluted regulations; the existence of a regulatory violation, let alone a criminal violation, can be determined only after a careful review of the facts and analysis of the applicable rules. Guilty or not, any businessman must take seriously any assertion by a government customer that an illegal act has occurred or any indication that an investigative agency has developed an interest in the businessman’s activities or any internal disclosure of a potential violation.

Such situations need to be treated like any potential white collar matter, with appropriate limitations on the client’s statements and preservation of evidence and prompt and careful internal investigation covered by privilege. Like other potential white collar situations, the client needs the advice of your white collar expert and your subject matter expert. Prompt but not precipitate action by counsel and the client are the order of the day.

And Even More Possibilities for Litigation: The other situation requiring rapid response is the pre-award dispute. Government contracting is unique in that the failure of the government buyer to follow applicable procurement rules gives rise to judicial and administrative remedies. Clients can find themselves on either side of these pre-award disputes, referred to as bid protests, either protesting an award to a competitor or defending an award to themselves. With these disputes, rapid action is vital to protect the client’s remedies. If a protest is filed within 10 calendar days, contract awards can be withheld or contract performance suspended. Protests may be taken to the procuring agency, the General Accountability Office (formerly known as the General Accounting Office) or the U.S. Court of Federal Claims. Agency and GAO protests must be filed in 10 working days of actual or constructive knowledge of the basis for the protest. We all know that it usually takes a client a week to decide whether to talk to a lawyer. You can do the math. D efending against a protest can also be time critical because the administrative and judicial protest processes move quickly. Deciding whether to protest is not a simple decision. There are both marketing and legal considerations to consider carefully. For large defense contractors dealing with bet-your-company bids, there may be no meaningful choice but to protest. For the typical client dabbling in government contracts, the issue can be difficult and confusing and decisions must be reached under considerable time pressure.

Although bureaucrats are not immune from typical customer emotions, it is important to understand that the government buyer’s motivations are not necessarily those of the usual commercial buyer. When and how to start an adversarial process with a government customer, either during the bidding process or during contract performance, is another topic for future commentary, as are the differences in the marketing and bidding processes in government contracting. Until then, be aware of the two situations that really need a quick response to protect the client’s interests, the threat (or even a hint) of a criminal investigation and the pre-award bid protest process.