Improper Business Practices - Subcontractor Kickbacks

FAR (Federal Acquisition Regulations) Part 3 is the source for information and guidance necessary to ensure the integrity of the Government's procurement system. It not only applies to Government agencies and employees but to contractors and subcontractors as well.

It includes sections on the prohibitions of gratuities to Government personnel, contingent fees, subcontractor kickbacks, "buying in"and anti-trust matters. Specific to contractors and subcontractors, FAR Part 3 covers whistleblower protections to contractor employees, requires codes of business ethics and conduct, and prevention of personal conflicts of interest for contractor employees performing acquisition functions. Its also the section that requires contractors and subcontractors to implement reasonable procedures to prevent and detect violations of the Anti-Kickback Act.

Over the next few posts, we will be examining some of these "improper business practices" with the idea that Government contractors and subcontractors will be in a better position to assess their own policies and procedures for compliance with the standards set by procurement regulations. We begin with the coverage in FAR 3.502, Subcontractor Kickbacks.

The term 'kickbacks' shouldn't really need to be defined - everyone knows intuitively what they are. But FAR includes a definition:

... means any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind ... for the purpose of improperly obtaining or rewarding favorable treatment ...

Under FAR 52.203-7 (and its statutory basis at 41 USC 87), any person (including legal entities) are prohibited from

1. providing or attempting to provide or offering to provide any kickback
2. soliciting, accepting, or attempting to accept any kickback, or
3. including, directly or indirectly, the amount of any kickback in the contract price charged by a prime contractor (or any level of subcontractor)

But the clause has other pro-active aspects. It requires contractors and subcontractors it have in place and follow reasonable procedures designed to prevent and detect possible violations of the anti-kickback prohibitions in its own operations and direct business relationships.

Procedures designed to prevent and detect kickbacks in an organization are not so obvious or easy to implement. Based on our experiences with many contractors, most of them have not implemented policies and procedures designed to detect and prevent kickbacks. Have you?

Contractor Employee Indicted in $1.9 Million Kickback Scheme

The Department of Justice released a press release earlier this month noting the Federal Grand Jury indictment of a contractor employee accused of accepting kickbacks (and tax evasion). The company he worked for (identified as Company A) furnished supplies, materials, equipment, and services to the Government. He approached a subcontractor to Company A and solicited kickbacks in exchange for:

1. Refrain from conduct that would unfavorably affect the subcontractor's business relationship with Company A, and
2. Help ensure that the subcontractor obtained additional subcontracting business.

Between June 2009 and December 2014, the employee accepted 57 kickbacks totaling $1.9 million. That might not have been the extent of the kickbacks - it only represents the amount that the Government investigators found.

In January and February of this year, the employee met with the subcontractor and accepted two more kickbacks totaling $30,000. However, by this time, the Government was on to the scheme and the transaction was "documented".

The contractor employee, whose title is Logistics Manager, maintains his innocence.

I've never done anything illegal in my life. I have a clear record, education wise, work wise, I give 100 percent to everything I do. I wouldn't do something stupid to jeopardize my family.

This is a reminder to contractors that according to the Anti-Kickback Act of 1986, there is a requirement to have in-place, policies and procedures to detect and prevent kickbacks. Read more about the Anti-Kickback Act here.

Anti-Kickback Act of 1986 - Part II

A couple of days ago we discussed certain provisions of the Anti-Kickback Act of 1986. Not only does the Act make it unlawful to pay and accept kickbacks, but it i) requires contractors and subcontractors to self-disclose any kickbacks it becomes aware of, and ii) requires contractors to implements and follow procedures designed to prevent and detect violations of the Act.

So, who's going to check and see whether contractors have implemented policies and procedures designed to prevent and detect violations of the Act? Well, DCAA (Defense Contract Audit Agency) for one. DCAA has reproduced the text of the Act in its Contract Audit Manual and has issued guidance to its auditors on how to report suspected violations of the act that they encounter during an audit. Additionally, auditors are required to "ascertain that contractors have informed their personnel...of the Act".

Most contractors have some sort of code of conduct and ethics program. We believe the easiest way to ensure compliance with the "prevention and detection" requirements of this Act is to modify existing ethics rules and employee training and awareness programs to include coverage of prohibitions against kickbacks. Annual employee declarations that they have violated no ethics rules would then cover kickbacks as well. Additionally, the "prevention and detection" provisions are not applicable to everyone in the company; only those personnel that have involvement with purchasing/procurement/subcontracting, or who might otherwise be in a position to influence the process.

Anti-Kickback Act of 1986

The Anti-Kickback Act of 1986 was passed to deter subcontractors from making payments and contractors from accepting payments for the purpose of improperly obtaining or rewarding favorable treatment in connection with a prime contract or a subcontract relating to a prime contract. What had theretofore been considered merely improper or unethical, now carried potential criminal penalties.

The Act prohibits any person from (i) providing, attempting to provide, or offering to provide any kickback, (ii) soliciting, accepting, or attempting to accept any kickback; or (iii) including, directly or indirectly, the amount of any kickback in the contract price charged by a subcontractor to a prime contractor or a higher tier subcontractor or in the contract price charged by a prime contractor to the Government.

The Act imposes criminal penalties on any person who knowingly and willfully engages in such conduct and provides for the recovery of civil penalties from any person who knowingly engages in such prohibited conduct and from any person whose employee, subcontractor, or subcontractor employee provides, accepts, or charges a kickback.

The Act requires contractors and subcontractors to provide written notification to the Inspector General of the agency issuing the contractor whenever it has reasonable grounds to believe such violation may have occurred and requires that contractors and subcontractors give access to facilities and records to investigate such matters.

The Act has one other provision that contractors are often blissfully unaware of. The Act requires contractors and subcontractors (with negotiated contracts and subcontracts greater than $100 thousand) to have in place and follow reasonable procedures designed to prevent and detect violations of the Act. These include:

• company ethics rules prohibiting kickbacks by employees agents, or subcontractors
• education programs for new employees and subcontractors
• explaining policies about kickbacks, related company procedures and the consequences of detection
• procurement procedures to minimize the opportunity for kickbacks
• audit procedures designed to detect kickbacks to law enforcement officials
• annual declarations by employees of gifts or gratuities received from subcontractors
• annual employee declarations that have violated no company ethics rules
• personnel practices that document unethical or illegal behavior

Are you in compliance?

See FAR 3.5 for regulatory requirements.