Contractors Need to Avoid Even the Appearance of a Conflict of Interest

An anonymous source tipped off the Mayor of Nashville Tennessee that one of its public works contractors was improperly entertaining city officials who were responsible for directing city business to that contractor. The Mayor immediately requested an audit. The now completed audit concluded that there was an "appearance of preferential treatment" to that firm who has more than tippled its average yearly revenue from the City. Since 2010, it has received nearly $50 million in contracts for street paving, sidewalks, and other work.

City officials responsible for awarding those contracts were spotted (and photographed) in the Contractor's suite at sporting events (Bridgestone Arena) and according to the audit, those City employees did not appear to have paid for their own tickets. Photographic evidence also showed City employees having drinks after hours with the Company Vice President.

While the audit concluded that there was an appearance of a conflict of interest, the audit did not produce evidence that the Contractor received a benefit from the city in exchange for the entertainment. Most of the employees involved denied taking any tickets for free. One employee admitted to failure to reimburse the contractor for two of his tickets. With regard to the after-hours entertainment, claimed they paid cash for their drinks.

Other allegations the audit was unable to substantiate included:

• Invoices with no support
• Only inspectors on good terms with the Contractor were allowed to perform inspections
• City officials "directed" the Contractor to work with specified subcontractors
• There was a conflict of interest because the City's senior procurement officer once worked for the Contractor.

So what was the outcome of this audit?

• The mayor returned the Contractor's campaign contributions
• The Contractor agreed to pay for certain re-work for which it was trying to obtain an equitable adjustment
• City employees will undergo ethics training.

Ready to Implement an Internal Company Hotline?

As some point during a company's growth, leadership will need to develop a hotline - a mechanism for employees to report violations of laws and regulations, harassment, fraud, waste, and abuse. For Government contractors, that point comes, at the latest, when they receive a $5.5 million dollar contract that exceeds 120 days (see FAR 3.1004 and FAR 52.203-13). The pertinent regulations requires contractors to implement an internal control system that includes ...

An internal reporting mechanism, such as a hotline, which allows for anonymity or confidentiality, by which employees may report suspected instances of improper conduct, and instructions that encourage employees to make such reports.

There are many ways to set up an internal reporting mechanism. Most larger contractors have dual mechanisms that include a traditional 1-800 telephone number and a web-based complaint form. Some even offer face-to-face reporting.

In setting up a hotline, there are some considerations that need to be adhered to and basic questions that need to be answered if a contractor is going to be able to effectively pursue the alleged impropriety. First, contractors need to be serious about pursuing hot line allegations. Employees will know real soon whether a hotline is real or for show. Second, contractors need to ensure anonymity for anyone using the hotline. Third, bedside manner is critically important. Don't put Hannibal Lecter in charge of taking information over your hotline. Find someone that can show a little empathy for the relator. Fourth, make certain that the 1-800 number is answered. Asking someone to leave a message is not going to ensure anonymity. Fifth, provide feedback to the relator where you can. If a caller chooses to remain anonymous, there is no feedback expectation. Otherwise, provide feedback to the caller at the conclusion of your investigation. Finally, assign the responsibility for the investigation to someone in your organization savvy enough to understand the issues and is not a party to the issue or in the relater's chain of command.

As far as questions are concerned, the more information you can obtain or glean from a caller, the better, quicker, more effective your investigation will proceed. One of the Government's Inspector General's hotline questionnaires contains the following questions:

• When did the issue occur?
• Where did the issue occur?
• Who took the action(s) at issue?
• What did the person (or people) do?
• To whom did the action(s) happen?
• What law, regulation or policy was violated?
• What remedy is being sought?
• Names and positions of witnesses.

Employees who report to internal hotlines have other avenues to report their concerns - most notably the Hotlines operated by the Inspector General's of the various executive agencies. If they're not satisfied with or afraid to use your internal hotline and choose to use an outside hotline, there's no telling where an investigation will lead or how much extra time and effort you will expend in coordinating with outside parties.

Mandatory Disclosure Program Nets the Government $1 Million

Back in 2008, FAR was amended to require contractors to disclose credible evidence of fraud and overpayments on contracts. This requirement is commonly referred to as the mandatory disclosure requirement and applies to contracts (and subcontracts) of more than $5 million and a performance period greater than 120 days. See "Mandatory Disclosure Requirements - A Reminder" for more details on the regulation.

Yesterday, the Department of Justice (DOJ) issued a press release announcing the resolution of just such a disclosure.

DRS Technical Services, Inc., was performing an internal compliance audit when it discovered that some of its employees working in Kuwait on Government contracts were directed to record more hours on their time sheets than they actually worked. As a result of this discovery, DRS took immediate corrective action and made a timely disclosure to the U.S. Government under the Contractor Business Ethics Compliance Program and Disclosure Rule (a.k.a. the Mandatory Disclosure Rule).

DRS calculated the mischarging resulted in overcharges of $544 thousand. Following an investigation by the Government, DRS agreed to pay $1 million to settle the case.

Incidentally, DRS was the defense contractor we reported on earlier who paid $13.7 million last October to settle another labor mischarging false claims allegation. See "Defense Contractor Pays $13.7 Million to Settle False Claims Allegation". That case was uncovered by a routine DCAA (Defense Contract Audit Agency) audit and not a voluntary disclosure.

The full DOJ press release can be viewed here.

Accepting Gifts from Outside Sources

The U.S. Office of Government Ethics (OGE) has proposed revisions to the Standards of Ethical Conduct for Executive Branch Employees that are designed to identify situations where Government employees should not accept what would otherwise be permissible gifts. Most Government contractors are required to have ethics and standards of conduct programs and many pattern theirs after the OGE's authorities and materials. Staying abreast of what the Government is doing in this area should help contractors keep their own policies and procedures fresh and current.

The proposed rules are quite lengthy and contain many situational examples of ethical conduct and ethical dilemmas. To read and study (and perhaps comment on) the entire proposal, click here.

One of the new sections proposed for addition to the guidance is entitled "Considerations for declining otherwise permissible gifts." The OGE wants to add this section because, in its experience, employees and ethics officials sometimes focus on whether a regulatory exception permits the acceptance of an otherwise impermissible gift, and no on whether acceptance of the gift could affect the perceived integrity of the employee or the credibility and legitimacy of the agency's programs.

To counter this tendency, the proposed regulations sets out a flexible, non-binding standard that employees are encouraged to use when deciding whether to accept a gift that would otherwise be permitted. Specifically, the new section encourages employees to consider the potential that a reasonable person would question their integrity if they were to accept the gift. In circumstances where an employee concludes that a reasonable person would question his or her integrity, the employee is encouraged to consider declining the gift.

Such considerations include:

• Whether the gift has a high or low market value
• Whether the gift was provided by a person or organization who has interests that may be affected substantially by the performance or nonperformance of the employee's official duties
• Whether acceptance of the gift would lead the employee to feel a sense of obligation ot the donor
• Whether acceptance of the gift would reasonably create an appearance that the employee is providing the donor with preferential treatment or access to the Government
• With regard to a gift of free attendance at an event, whether the Government is also providing persons with views or interests that differ from those of the donor with access to the Government
• With regard to a gift of free attendance at an event, whether the event is open to interested members of the public or representatives of the news media
• Whether acceptance of the gift would cause a reasonable person to question the employee's ability to act impartially and
• Whether acceptance of the gift would interfere with the employee's conscientious performance of official duties.

Of course, the fail-safe policy is never to accept gifts, period.

Want to Show Your Appreciation to a Government Employee With a Small Gift?

The Government has a set of ethical standards that it expects its employees to adhere to. Government contractors, at least those with a $5 million contract that extends more than four months, are required to implement business ethics and compliance programs.We would take it a step further and suggest that every Government contractor have one, regardless of their sales volume.

We were recently reminded of this as we were reading an article about a Government whistleblower who alerted the authorities to the fact that another employee (a contracting officer) was receiving some pretty nice gifts from a contractor. This alleged gifting occurred overseas where sometimes, cultural norms conflict with the ethical standards expected of Government employees. Nevertheless, Government employees are bound by Standards of Conduct for Employees of the Executive Branch, not by the cultural norms of the country they happen to interacting in some fashion.

We've written extensively in these pages concerning ethical standards for contractors and Government employees. Concerning the giving of gifts, we wrote a comprehensively piece back in 2010. There is a little bit of wiggle room (e.g the $20 maximum) but we've always cautioned clients to err on the side of caution and don't give gifts period. Sometimes appearances, while they can be deceiving, can cause a lot of grief,

The Office of Government Ethics (OGE) published the Standards of Ethical Conduct for Employees of the Executive Branch in 1992 (codified in 5 CFR Part 2635). It sets forth a series of overarching principles of ethical conduct and instructs employees to apply them when considering situations not specifically addressed by regulations. It also, for situations that involve appearances of conflicts, provides that the circumstances be judged from the perspective of a reasonable person with knowledge of the relevant facts.

Subpart B prohibits Government employees from soliciting or accepting gifts from prohibited sources or gifts given because of their official position. The term "prohibited source" includes anyone seeking business with or official action by an employee's agency and anyone substantially affected by the performance of the employee's duties. For example, a company bidding for an agency contract or a person seeking an agency grant would be prohibited source of gifts to employees of that agency.

The term "gift is defined to include nearly anything of market value. However, it does not include items that clearly are not gifts, such as publicly available discounts and commercial loans and it does not include certain inconsequential items, such as coffee, donuts, greeting cards, and certificates.

There are several exceptions to the prohibitions against gifts from outside sources. For example, with some limitations, employees may accept"

• Unsolicited gifts with a market value of $20 or less per occasion, aggregating no more the $50 in a calendar year from any single source
• Gifts motivated by a family relationship or personal friendship (but caution is advised when it comes to personal friendships. Some agencies will transfer employees to other assignments if there is a family or personal friendship involved).
• Free attendance at certain widely-attended gatherings, such as conferences and receptions, when the cost of the attendance is borne by the sponsor of the event (this, of course, does not include tickets to sporting events).
• Food, refreshments, and entertainment at certain meetings or events while on duty in a foreign country.

Government contractors and Government employees can adhere to these gifting standards but it only takes one person, who does not have all the facts but is concerned about appearances to blow the whistle. At that point, all parties are in for a prolonged investigation, most likely by an IG (Inspector General) organization that will cost plenty of resources. Our advice, just avoid gifting altogether.

Government Contractor Disclosure Program

By now, most contractors know that if they have a $5 million contract, they need a code of business ethics and conduct. If you're unsure, check your contract(s) to look for FAR Clause 52.203-13, Contractor Code of Business Ethics and Conduct.

There are a number of facets to the code of ethics and conduct clause but today we want to focus on just one of those; the requirement for contractors to disclose to the Government, credible evidence of criminal violations involving fraud, conflict of interest, bribery, gratuity violations, or violations of the civil False Claims Act. The exact wording reads as follows:

(3)(i) The Contractor shall timely disclose, in writing, to the agency Office of the Inspector General (OIG), with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of this 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 found in Title 18 of the United States Code; or
     (B) A violation of the civil False Claims Act (31 U.S.C. 3729-3733).

This is a significant clause and more than a few contractors are getting tangled up in failing to comply with the requirements. Some contractors have plead ignorance to a particular situation maintaining that they didn't know about the impropriety. Some have maintained that the impropriety had no impact on Government contracts. Others have tried to wiggle around the word "credible", asserting that a hint or inkling doesn't make it "credible". Still others have maintained that they didn't know the "impropriety" rose to the level of criminal law or violations of the False Claims Act. 

The DoD-IG (Inspector General) has made it rather easy to file a written notice of violations. They've set up a special website called the Contractor Disclosure Program where contractors can complete an on-line form and wait for a knock on their door from their investigators. Other Agency's have similar programs. The purpose of this website is to 

• Afford contractors a means of reporting certain violations of criminal law and violations of the civil False Claims Act 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.

This particular website has additional information that will be useful to contractors preparing to self-disclose some form of contract irregularity.

"Reporting" is not a matter to be taken lightly and we always recommend that contractors contact legal counsel before doing so. 

If you need assistance in setting up an ethics program for your firm, give us a call.

Mandatory Disclosure Requirements - A Reminder

In November 2008, FAR was amended to require mandatory disclosure requirements involving fraud and overpayments on contractors (and subcontractors). These disclosure requirements apply to contracts greater than $5 million and a performance period greater than 120 days. This disclosure requirement applies to most types of contracts including commercial items and contracts awarded and/or performed overseas.

FAR 52.203-13 requires timely disclosure of violations against criminal and civil laws. Criminal laws include fraud, conflict of interest, bribery, or gratuity violations. Civil laws include the False Claims Act. There must be credible evidence of a violation and the violation must have been committed by any contractor principal, employee, agent, or subcontractor.

Disclosures must be made in writing to the appropriate Inspector General (e.g. the DoD Inspector General for DoD Contracts) and the contracting officer. The reporting period extends from contract award to three-years after final payment. Many contractors do not realize that the reporting period extends beyond the contract period of performance.

The term "credible evidence" is undefined. but the FAR Councils have noted that the term indicates a higher standard than "reasonable grounds to believe". Implicit in this distinction is an allowance of time for a contractor to investigate matters to make a "credible evidence" determination. Failure to disclose credible evidence of criminal and civil violations (and significant overpayments) constitute grounds for suspension and debarment.

They Walk a Mighty Fine Line

Approximately 80 percent of the Department of Energy's workforce is comprised of contractor personnel who provide services to assist with managing projects and programs. This type of environment, according to DoE's Office of Inspector General, can present unique situations that require special diligence from DoE managers, requiring them to balance support needs with ensuring that applicable Federal regulations and procurement guidelines are followed.

Generally, Federal employees are prohibited from becoming involved in contractor employee personnel matters such as hiring and terminating personnel, supervising contractor employees and assigning tasks to contractor employees that, by Federal regulation, can only be performed by Federal employees.

In a recently released "Inspection Report", the DoE Inspector General reviewed allegations that a manager at one of its sites tried to influence contractor hiring decisions. In one case, the manager spoke with contractor officials regarding the qualifications and hiring of a particular individual. Although the manager did not order or direct the contractor to hire the individual, the contractor ultimately hired him.

In the second case, about two years later, the same manager attempted to secure a position for the same individual at another service contract. That attempt failed when the individual was hired by someone else.

The IG found that the manager had taken certain actions on behalf of a particular contract individual but there was insufficient information gathered during the review to indicate that he violated Federal procurement guidelines. Nevertheless, the IG concluded that the actions taken by the manager may have caused others to perceive that the manager acted improperly.

As a general rule, Federal managers must not

1. direct a contractor to hire a particular individual (but they may provide the contractor with the names of individuals that are competent.
2. direct a contractor to fire a particular individual
3. design work requirements around a single individual

DoD and Its Hotline Posters

Today, the DoD published a final rule requiring all contractors with a contract greater than $5 million, to prominently post the DoD IG hotline poster in common work areas within all business segments performing work on DoD contracts and, if the contractor maintains a company website as a method of providing information to employees, the contractor must display an electronic version of the poster there as well.

FAR (Federal Acquisition Regulations) has contained a requirement to display hotline posters for several years. However, FAR has an exemption for certain contractors. FAR 52.203-14(c) states that if contractors have implemented a business ethics and conduct awareness program, including a reporting mechanism, such as a hotline poster, the contractor need not display any agency fraud hotline posters.

The DoD IG (Inspector General) determined that this exemption has the "potential to make the DoD hotline program less effective by ultimately reducing contractor exposure to DoD IG fraud hotline posters and diminishing the means by which fraud, waste, and abuse can be reported under the protection of Federal whistleblower protection laws".  According to the DoD IG, some contractors' posters may not be as effective as the DoD poster in advertising the hotline number, which is integral to the fraud program.

The new DFARS (DoD FAR Supplement) clause, 252.203-7004, replaces FAR 52.203-14 and provides no exception to the use of the DoD hotline poster for contractors that have implemented a business ethics and conduct awareness program, even those that include a reporting mechanism such as hotline poster.

You can download or order hotline poster at the DoD-IG's website.

Government Oversight of Contractor Ethics

We've written quite a bit about the FAR requirement for contractors to maintain codes of business ethics and conduct. At a minimum, Government contractors must have their codes in writing, make them available to every employee and exercise due diligence to prevent and detect criminal conduct and promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law. There are more requirements applicable to non-small businesses.

While the requirement was published a number of months ago, there was no assignment of a Government oversight role. We speculated once that DCAA would review for compliance in conjunction with audits of contractor accounting systems because there is a large component of the standard audit program dealing with contract ethics. These reviews however are few and far between because they are only performed at contractors with $100 million or more in annual costs under cost-reimbursable contracts.

The lack of Government oversight has now been fixed. The FAR Councils have added to the list of contract administration functions in FAR 42.302, a requirement to ensure that contractors have implemented the mandatory contractor business ethics program requirements of FAR 52-203-13. This change, published and effective today, was made in response to recommendations from a recent GAO report on strategies to improve the effectiveness of the Government's oversight of contractor business ethics and conduct programs.

Contractors should expect some form of communication from contract administration (e.g. DCMA) regarding this added function and possibly some implementing procedures they will follow to ensure contractor compliance.

Now That's a Lot of Water

The Department of Justice announced yesterday that an Army contracting officer pleaded guilty to accepting $400 thousand in bribes from a company in exchange for awarding that company a two-year contract to supply bottled water to U.S. troops in Iraq. You can read the entire press release here. Although the press release did not indicate the value of the contract, we can assume that it was substantial if the contractor was willing to spend that kind of money in order to secure the contract. This particular contracting officer now faces 10 years in prion, must pay back the $400 thousand, and also pay fines.

The DoJ announcement does not give the fate of the contractor. Presumably the contractor has been at least debarred - prevented from obtaining future Government work. Its possible, but doubtful, that the acts were perpetrated by rogue elements within the organization without management knowledge. The announcement does not indicate how the kickback scheme was uncovered. Since this incident was part of a wider scheme that involved other parties and more than $9 million in bribes, there could have been a whistle-blower involved or perhaps a company that didn't appreciate being shook-down came forward.

Government contractors are required to develop and maintain ethics programs. One of the fundamental elements of such a program is for management to set a proper "tone at the top". When management does not set and adhere to ethical principles, employees notice and soon begin to believe that it is fine to bend rules. Employees might even find there are rewards to bending rules in the form of promotions, recognitions, and bonuses.

DoJ Announces 2010 Fraud Recoveries

The Department of Justice issued a press release this week announcing that it had recovered $3 billion in civil settlements and judgments in cases involving fraud against the Government during fiscal year ended September 20, 2010. Of the $3 billion in recoveries, $2.5 billion related to health care fraud claims. Also, of the $3 billion recovered, $2.3 billion came from lawsuits filed by whistleblowers - typically employees who didn't like what they were seeing from their employers.

Health care fraud is the new recovery bonanza for the Justice Department. They recently created the "HEAT" team (Health Care Fraud Prevention and Enforcement Action Team) to increase coordination and optimize criminal and civil enforcement. Besides health care fraud, the recoveries included wartime and other government procurement contracts, grants for small business, federally insured mortgages, mineral leases and other federal programs. Recoveries on cases related to Iraq and Afghanistan totaled $10.6 million, a surprisingly paltry amount given all the hearings and publicity surrounding wartime contracting deficiencies.

Government contractors are reminded of their contractual requirements to maintain effective ethics programs to prevent and detect fraudulent activity. We have written extensively on this blog about those requirements and obligations that vary depending upon the amount of contracting. At a minimum, all contractors must display an agency Hotline poster.

To read the entire press release from the Department of Justice, click here.

Contractor Employees Joining the Government

Today we conclude our five part series on potential ethics issues that contractors may face when working with Government employees. It's important to ensure that your interactions with Government employees don't inadvertently trigger ethics problems for them. Today’s issue involves contractor employees who go to work for the Government.

Ethics questions can arise for contractor employees who enter Government service after working in the private sector.

Many former employees have continuing financial interests in their former employer such as post-retirement benefits, 401k plans invested in company stock, deferred compensation and ESOPs, to name a few. These continuing financial interests might pose a conflict of interest. These conflicts must be somehow resolved. Often times they are resolved by resolved by divestiture, recusal or other measures. Blind trusts are sometimes used for “high level” Government positions.

Even where conflicts are resolved, there is a general rule that prohibits contractor employee from working, for one year after leaving a former employer, on any contract or other Government matter in which his/her former employer is a party (or represents a party), particularly if either he/she or an agency ethics official determines that a reasonable person would question his/her impartiality.

Where to Get Help

The issues that arise when Government and contractor employees interact can be quite complex and no blog is going to give you the comprehensive answers for every question you might have.

Here are a few web links from the United States Office of Government Ethics (OGE) that you might find helpful:

Ethics and Working with Contractors---Questions and Answers

List of agency "Designated Agency Ethics Officials"

Link to Office of Government Ethics Home Page

Restrictions After an Employee Leaves Government Service

Today we present the fourth of our five part series on potential ethics issues that contractors may face when working with Government employees. It's important to ensure that your interactions with Government employees don't inadvertently trigger ethics problems for them. Today’s issue involves certain prohibitions that persons face when moving from the public to the private sector.

 

There are certain restrictions that apply to Government employees after they leave Government service.

 

Here are three of them:

• Lifetime ban on representing any other person before the Government on the same Government matter, such as a contract, on which they worked for the Government. This means the former employee may not sign a letter, attend a meeting, make a presentation, make a telephone call or make any other communication or appearance before the Government in connection with the same matter on which the employee worked.
• Two-year ban on representing another person before the Government on the same contract (or other Government matter) that was pending under the employee's official responsibility during the last year of the employee's Government service.
• One-Year "cooling-off" period for any matter involving the employee's former agency. This provision applies only to "senior" employees whose basic pay is above a certain level.

 "Behind-The-Scenes" Work

• If a former Government employee goes to work for a contractor and works "behind the scenes" on the same contract he worked on as a Government employee, he will not violate the criminal and post-employment provisions just described. But, former employees need to be careful! The post-employment rules apply even if the contract specifically requires contractor personnel to communicate with the Government.  
• Although certain non-controversial routine or administrative communications are not prohibited, many communications that a former employee might make while performing the contract may involve the intent to influence the Government, because the contractor and the Government have potentially differing views or interests on the matter being discussed.

Procurement Integrity Act - The Procurement Integrity Act contains restrictions on the post-employment activities of certain Government employees.

• If a former Government employee has served in certain contracting roles, or performed specific contracting functions, on certain matters over $10,000,000 involving a particular contractor, then the former employee is generally prohibited, for one year, from receiving compensation from the contractor for service as an employee, officer, director, or consultant. That means that if these criteria are met, a former employee may not even work "behind-the-scenes" for compensation.
• This prohibition does not prevent a Government employee from going to work for a division or affiliate of the contractor that does not produce the same or similar products or services as the division or affiliate of the contractor responsible for the contract in which the employee was involved.

 

 

 

Hiring Away Government Employees

Today we present the third of our five part series on potential ethics issues that contractors may face when working with Government employees. It's important to ensure that your interactions with Government employees don't inadvertently trigger ethics problems for them. Today’s issue involves the hiring of Government employees.

It is common for Government employees leave Government service and go to work for contractors. It's also true that employees working for contractors sometimes enter Government service. As a result, there are a number of ethics issues that arise from these changes in employers. This is sometimes called the "revolving door."

Not surprisingly, there are laws and regulations that cover these situations. There are several laws and regulations that govern what a Government employee must do while seeking or negotiating future employment with a contractor.

Seeking/Negotiating Employment with Contractors

Generally, Government employees may not work on Government matters affecting contractors with which they are seeking employment. Seeking employment includes (but is not limited to) unsolicited contacts about possible employment, such as sending a resume to a firm or contractor.

Government employees may not work on Government matters affecting the financial interests of a contractor if they make any response other than rejection to a contractor's unsolicited overture about possible employment. For example, a Government employee who just interviewed with your company for a job may not work on any procurement matter concerning your company.

The Procurement Integrity Act

The Procurement Integrity Act imposes requirements on Government employees who participate in procurement above a certain threshold.

Government employees who participate in such procurement must report to their supervisor and their agency's ethics officials if they contact, or are contacted by, a bidder or offeror regarding possible employment.

A Government employee must also either reject the possibility of employment or not participate in the procurement until the employee's agency has authorized the employee to resume participating.

Moonlighting for Contractors

Sometimes Government employees consider "moonlighting" by working for a contractor after-hours. Ethics regulations prohibit Government employees from holding outside employment that conflicts with their official duties. Government employees also may not hold outside employment that creates the appearance of using public office for private gain.

For example, a Government employee wants to get a part-time job with a contractor that does business with her agency. Her official duties involve work this contractor. This would be considered a conflict with her official duties.

Additionally, some agencies have specific rules requiring prior approval for outside employment, as well as restricting the types of outside employment that their employees may hold.

Interacting with Government Employees

Inevitably, Government contractors or potential Government contractors will find themselves face-to-face with Government employees. As a contractor or contractor employee, you might find yourself working at a Government site along side Government employees. At larger contractors, Government employees are working right there in your facility. You might find yourselves together at the same hotel for a conference (e.g. an NCMA conference) or for contract negotiation or some kind of performance review. .

 

It's important for you to know about the ethics rules and principles that apply to Government employees - particularly if you work closely together. It's important to ensure that your interactions with Government employees don't inadvertently trigger ethics problems for them.

 

This week, we are going to examine some of the more common ethics issues that come up when working with Government employees. Much of this information comes from materials published by the U.S. Office of Government Ethics. You can visit their website for more information. On Friday, we will link to some specific areas within that site that further address the issues we will cover this week. Those issues include

 

• Conflicts of interest, impartiality and related ethics issues
• Gifts that Government employees may accept from contractors
• Government employees seeking work as an employee of a contractor
• What happens after Government employees leave Government service to work as a contractor employee
• What happens when contractor employees enter Government service

 

The subject of ethics is important because Government employees hold their jobs as a matter of public trust. That trust is fulfilled when employees follow general principles of ethical conduct as well as specific ethical standards. Additionally, FAR requires contractors to maintain codes of ethics and business conduct.

 

Conflicts of Interest

 

Government employees are prohibited from having financial conflicts of interest with their official work. Generally, a Government employee may not work on a Government matter that will affect his financial interests, or the financial interests of:

 

• a spouse or minor child
• a general partner
• an organization he serves as an officer, director, trustee, general partner or employee, and
• a person with whom he is seeking or has an arrangement for future employment.

Maintaining Impartiality and Integrity

 

Even when a Government employee doesn't have a financial interest that can be affected by a contract, situations may sometimes arise that can call his impartiality into question such that he may have to disqualify himself from working on a contract.

 

If the employee or his agency believes that a reasonable person, with knowledge of the relevant facts, might question the Government employee's impartiality, the employee must stop working on the matter and seek assistance from an ethics official.

 

Spousal Employment

 

Sometimes a Government employee has a spouse who works for a contractor that does business with that employee's agency. In this case, the Government employee may be prohibited from working on an agency contract with the contractor.

 

Representing Contractors

 

Government employees are generally prohibited from representing an outside party to the Government. This means that they may not represent any contractor in dealings with the Government whether or not they've been paid by the contractor to make the representation.

 

Example: A contractor wants to hire a Government employee to represent the company in negotiations with the Government on a new contract. The Government employee may not represent the company back to the Government...even to a different agency from the one where she/he is employed.

 

Personal Relationships

 

Under the ethics rules and laws, a Government employee is not automatically prohibited from working on a Government matter (such as a contract) involving a person with whom he has a personal relationship (e.g., dating, or someone who is a friend or relative). However, Government employees need to exercise caution and should consider whether a reasonable person, with knowledge of the relevant facts, might question their impartiality.

 

For example, an employee should not continue working on a Government contract if he were dating one of the contractor's employees and were in a position to review that person's work.

 

Reminder to Display Hotline Poster

We have written in the past about the requirements for contractors to have written codes of business ethics and conduct, to maintain an ongoing ethics awareness and compliance program and to implement related internal control systems. Generally, these requirements apply to contracts over $5 million with a performance period longer than 4 months (FAR 52.203-13). For contractors under this threshold, there is a requirement to display hotline posters (FAR 52.203-14). Hotline posters provide a confidential '800' number for company employees to report fraud, waste, and abuse. It's probably a good idea for contractors above the threshold to display the poster as well. The hotline poster could be part of the ongoing ethics awareness and compliance program.

The contracting officer is required to insert the source for the hotline poster in the contract clause. Most agencies have their own poster. The DoD hotline poster can be ordered or downloaded here. If the "source" is left blank in your contract(s), you should contact your contracting officer for specific sources. The contract clause also requires that contractors display an electronic version of the hotline poster on the company website if one is maintained for providing information to employees.

Auditors will not schedule a specific audit to test for compliance. But, as part of another review (e.g. labor floorcheck, proposal evaluation, incurred cost audit, voucher review) will check for compliance with this contract requirement. Failure to comply could factor into the auditors' overall risk assessment and increase the level of audit activity.

A "Do Not Pay" List?

The headline on this White House memorandum got our attention: Enhancing Payment Accuracy Through a "Do Not Pay List".  The June 18th memorandum announces a new policy that is intended to prevent payments to deadbeats - individuals or entities that owe the Government money. Its not as draconian as it sounds, it simply requires that prior to payments, disbursing offices consult with a number of available Government databases to ensure that the payee doesn't owe the Government money from back taxes or other liabilities.

The premise for this new policy is to prevent payment errors before they occur. While its important to recapture improper payments, its more effective to avoid payment errors in the first place. As the memorandum states:

"...where data available to agencies clearly shows that a potential recipient of a Federal payment is ineligible for it, subsequent payment to that recipient is unacceptable. We must ensure that such payments are not made.

Federal agencies maintain many databases containing information of a recipient's eligibility to receive Federal benefits payments or Federal awards, such as grants and contracts. By checking these databases before making payments or awards, the Administration believes that agencies will be able to identify ineligible recipients and prevent improper payments from being made in the first place.

Agencies will now be required to review the following databases before they release any Federal funds:

• Social Security Administration's Death Master File (we guess that if you're dead, you should not be contracting with the Government)
• General Services Administration's Excluded Parties List System
• Department of the Treasury's Debt Check Database
• Department of Housing and Urban Development's Credit Alert System or Credit Alert Interactive Voice Response System
• Department of Health and Human Services' Office of Inspector General's List of Excluded Individuals/Entities.

This network of databases, and additional databases so designated by the Director of the Office of Management and Budget (OMB) in consultation with agencies, shall be collectively known as the "Do Not Pay List."

The remainder of the White House memo deals with timelines, coordination between agencies, and coming up with some best practices for implementation to disseminate to all Government Agencies. To read the entire memorandum, click here.

Impact of "Negative" Reviews

Last Friday's news illustrates the importance of good internal control systems and strong ethical values.

Last Thursday, AeroViromment, a predominantly Government contractor in Southern California, disclosed in its 10-K filing with the SEC that it had been under investigation by the Department of Justice over its billing practices since February. Friday morning, its share prices immediately took a 10 percent hit and caused the company to expend considerable resources to prepare statements, press releases, and answer questions from reporters, stock analysts, and others. Its amazing that one tiny footnote can cause so much chaos and have such a financial impact.

The statement implies that AeroVironment was somewhat in the dark themselves over what might have triggered the DOJ investigation. It states that the investiagtion "may" have resulted from DCAA audit activity but they were not certain. 

“We are currently cooperating with this investigation, which we believe may be the result of prior DCAA [Defense Contract Audit Agency] audit activity. An unfavorable outcome to such an audit or investigation by the DCAA, DOJ or other government agency, could materially adversely affect our competitive position, affect our ability to obtain the maximum price for our products and services, and result in a substantial reduction of our revenue.”

AeroVironment must have spent most of Friday in damage control. In one of its clarifying statements, it stated that the investigation focuses on three areas:

• The appropriateness of certain expenses included in the company’s fiscal year 2006 Incurred Indirect Cost Claim (reconciliation of projected rates to actual rates.)
• Billing labor rates associated with time and materials government contracts.
• Billing rates for Small Unmanned Aircraft Systems maintenance and repair contracts.

Trying to downplay the 10-K disclosure, the company also stated that it does not believe the probe will have a material impact on its business, and so far has not had an impact on the company’s ability to receive government contracts. AeroVironment said it believes most of the issues have been previously addressed in the DCAA audit processes, and that time and materials government contracts have accounted for less than 1% of the company’s revenue over the last 6 years. The company said it is cooperating with the investigation, and that no claim has been filed against AeroVironment to date.

We have no insight beyond what has been reported. However, in our experience, there is more to this than what AeroVironment wishes. If the "audit issues" were previously addressed, there would be no need for a DOJ investigation. Additionally, while any auditor can report a SIC (Suspected Irregular Conduct), most of them are administratively closed because there is no merit to the allegation or the impact is so insignificant as to not warrent further investigation. Therefore, in the rare case that DOJ intervenes in the case, there is probably some fire with that smoke. We haven't heard the end of this story.

Every Company Needs an Ethics Programs

If your company does not have a Business Ethics and Compliance program, its time to change the situation. Right now, the FAR threshold for implementing a mandatory program is a $5 million contract that lasts for at least four months. However, many of the companies that have been suspended or debarred from Government contracting because of ethical lapses have had contracts much smaller than $5 million.

The Defense Industry Initiative on Business Ethics and Conduct has developed a tool kit to help Government contractors develop an ethics program. This toolkit is available at their website http://www.dii.org/ which has many other resources to help contractors develop robust ethics programs. For example, the toolkit will help contractors identify risk areas such as

• sloppy timekeeping practices
• business courtesies
• supplier kickbacks
• environmental protection

The kit will also help companies

• establish procedures to detect and prevent occurrences of unethical activities
• establish internal compliance programs
• set up training programs.

One of the most important elements to an effective business ethics and compliance program is to set a proper "tone at the top". According to the Association of Certified Fraud Examiners, "tone at the top"

refers to the ethical atmosphere that is created in the workplace by the organization's leadership. Whatever tone management sets will have a trickle-down effect on employees of the company. If the tone set by managers upholds ethics and integrity, employees will be more inclined to uphold those same values. However, if upper management appears unconcerned with ethics and focuses solely on the bottom line, employees will be more prone to commit fraud because they feel ethical conduct is not a focus or priority within the organization. Employees pay close attention to the behavior and actions of their bosses, and they follow their lead. In short, employees will do what they witness their bosses doing.