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SPECIAL PROMOTIONAL SECTION HBizlaw 2008 NEW GOVERNMENT CONTRACTOR ETHICS REQUIREMENTS A New Program to Implement Old Obligations BY TERRY E. THOMASON, CORIANNE W. LAU, BARBARA A. KRIEG AND ELIZABETH HAWS CONNALLY If your business is among those Hawai`i companies that pursue federal government contracts, you should be aware of the government’s increased emphasis on contractor ethics. In November 2007, a new Federal Acquisition Regulation (FAR) ethics program was caused by dishonesty or ethical lapses. Sanctions for ethical shortcomings can announced. Under the new rule, include adverse performance evaluations, monetary claims against the contractor, contractors and subcontractors suspension and debarment actions, civil suits, and in egregious cases, criminal must establish an internal ethics prosecution. program consisting of: (1) a formal company Code of Ethics and The Purpose of the FAR Ethics Program Rules Standards of Conduct, (2) employee compliance training, and The vast majority of contractors and subcontractors are ethical and take great (3) internal control systems, which pride in their reputation for business integrity. Even the most ethical contractors, must include the posting of a fraud however, can run afoul of federal ethics standards. Most violations are not the hotline notice to encourage result of intentional misconduct by senior managers and officers, but instead result reporting of violations. The new from the actions of less experienced employees. In their eagerness to benefit their rule became effective on December employer, these employees sometimes do things that government contracting 24, 2007, and it will force officers may see as an effort to cut corners, inflate cost claims or overstate price contractors to take steps to prevent adjustment requests. Other violations arise from simple misunderstandings and violations of long-standing ethics oversights by well-meaning employees who are unaware of the strict ethical rules obligations. that govern federal contracting. The Rule applies to contracts and subcontracts valued at $5 Selected Ethics and Standards of Conduct Rules million or more, but not to contracts awarded under the To create a meaningful company ethics program, each contractor must ensure commercial purchase provisions of its Code of Ethics and internal controls system address the major ethics standards FAR Part 12 or to those performed already embodied in federal laws and rules. At a minimum, contractors should outside the United States. Small ensure their programs provide employee training and establish internal controls to businesses are also exempt from the comply with the following ethics obligations: Rule requirements. However, even exempt contractors must strictly “Kickbacks”– Gifts and Gratuities Offered or Given to Prime comply with contractor ethical Contractors and Higher-Tier Subcontractors standards. For contractors and While most contractors and subcontractors are sensitive to the prohibition subcontractors engaged in federal against gifts and gratuities to federal officials, many are not aware that the same contract work, the new Rule is a principles extend to relations between prime contractors and subcontractors. clear signal of increased emphasis The federal government benefits from reasonable competition in the award of on ethics. Federal agencies will be subcontracts. To ensure these benefits are not lost to corruption, federal law obligated to look closely at prohibits payments from subcontractors to prime contractors and higher-tier contractor conduct and will not subcontractors for the purpose of obtaining favorable treatment in the award of tolerate errors that appear to be SPECIAL PROMOTIONAL SECTION HBizlaw 2008 subcontracts. The federal Anti-Kickback Act of 1986 bars the giving or receiving former government officials, could of “…any money, fee, commission, credit, gift, gratuity, thing of value, or influence former colleagues in compensation of any kind …” for the purpose of obtaining a subcontract on a government in the award of a federal contract. contract. Such a “contingent fee” The Act’s use of the broad term “thing of value” in its definition of arrangement is seen as creating too prohibited “kickbacks” makes any gratuity from a subcontractor dangerous. great an incentive for consultants to While it is good business practice for prime contractors to create relationships use their influence to cause an and alliances with trusted subcontractors, these team-building efforts can often improper award and thereby lead to social contacts, friendships and business courtesies. The resulting corrupt the procurement process. environment can inadvertently result in extravagant gift-giving, sponsored Sanctions for violations of this rule invitations to sports or other events, and contributions of other “things of value” include contract termination and to cement relationships. contractor debarment. Consequently, contractors and subcontractors must ensure their internal policies create safeguards against “team-building” contacts that go beyond general business courtesies. No gifts or gratuities should be made that could appear to be the exchange of a “thing of value” in return for favorable treatment in the award of a subcontract. “It is a Creation of formal safeguards against “kickbacks” is mandatory -- not optional. FAR Clause 52.203-7 incorporates Anti-Kickback Act prohibitions into criminal all federal contracts and specifically requires contractors to have internal procedures to detect and prevent kickbacks. The Clause’s same requirements also “flow down” and extend to lower-tier subcontractors. offense to offer Gifts and Gratuities Offered or Given to Federal Employees or give Similarly, the giving of any “thing of value” to federal employees can violate anything of ethics rules. It is a criminal offense to offer or give anything of value to a government official for the purpose of influencing a government decision. value to a Depending on the circumstances, such a gesture can violate the criminal prohibition against bribery or constitute the lesser contract violation of offering a government “gratuity.” Contractors and subcontractors should be aware that if an employee of theirs presents a gift in any form to a federal employee, that government official for the worker is required, under federal employee standards of conduct rules, to report the incident. As a result, an investigation will ensue. The federal rules permit certain limited offerings in cases that could not be purpose of reasonably seen as improper. For example, the federal ethics rules provide an exception for “modest items” of food and refreshments. Be aware, however, the influencing a meaning of “modest” is often debatable, and actions insensitive to the general prohibition can lead to bad results. As an example, an offering of coffee at a government morning meeting in the contractor’s business office could be permissible. However, a more generous offering of sandwiches and drinks could be decision.” questioned, and a buffet providing a full meal would likely be a violation. Use of “Contingent Fee” Arrangements in the Pursuit of Federal Contracts Accuracy in Contractor Another ethics rule that may not be apparent to contractors is set forth in Representations and FAR Clause 52.203-5, which requires that contractors avoid any “contingent fee” Certifications arrangement in relation to the contract solicitation. This prohibition means that a contractor may not engage a consultant to help win the contract under terms During all federal where the consultant will be paid only if the contractor receives the contract. procurement selection processes, This ethics rule grows from the fear that “insiders,” such as retirees or competitors are required to make SPECIAL PROMOTIONAL SECTION HBizlaw 2007 representations and certifications concerning their eligibility to receive the result in payment claims in excess contract. These include a statement that no officers or owners have been debarred of $100,000 must be accompanied and a precise declaration of the level of business revenues or number of employees by a contractor certification that when the contract is being considered for small business set-aside. confirms the claim is asserted in During the performance of federal contracts, contractors must also make good faith and the supporting cost certifications confirming compliance with performance obligations and the data are accurate and complete. On accuracy of their cost and pricing data. For instance, most construction Defense contracts, even an initial contractors must submit certifications attesting that workers have been paid in request for an equitable price accordance with applicable labor standards requirements. Contract changes that adjustment in excess of $100,000 must include the same certification. Federal contracting ethics rules demand that contractor employees We Can Help. be absolutely accurate in all certifications and representations. Overstating qualifications or including high-side cost estimates to give room for the negotiation of claims is not allowed, and inaccurate certifications can lead to prosecution for false statements, contract payment set-offs, contract terminations and debarment. Conclusion This discussion covers only those areas that give rise to the most frequent violations by businesses contracting and subcontracting Standing, left to right: Shannon M.I. Lau, Corianne W. Lau, Jessica Y. Wong, Blake K. Oshiro with the federal government. Seated, left to right: Barbara A. Krieg, Terry E. Thomason, Anna M. Elento-Sneed, Elizabeth A. Haws Connally. Not pictured: Louise K.Y. Ing Additional areas of concern include protections for employees who Alston Hunt Floyd & Ing has an experienced government contracts team. report violations; cost principles; Our attorneys understand the federal and state procurement rules, and and control procedures to confirm the government agencies and personnel who implement these complex accuracy of certifications. systems. We help prime contractors and subcontractors to navigate through these systems, and we provide consultation and legal representation in a Federal contractor ethics wide variety of areas, including: obligations will grow in importance 3 Contract Competition & Formation under the new FAR rule. (including solicitations, teaming agreements) Consequently, a comprehensive 3 Contract Administration ethics program protecting against (including labor standards, ethics and compliance programs) violations is a smart investment for 3 Special Topics any contractor with aspirations of (8(a) certification, small business matters, privatization, grants, qui tam actions) securing and expanding its 3 Contested Matters such as protests and claims disputes government contract business. (including terminations and debarment proceedings) Exceptional Quality 3 Excellent Service 3 Commitment American Savings Bank Tower, 18th Floor 1001 Bishop Street, Honolulu, HI 96813 Tel:(808)524-1800 Fax:(808)524-4591 Carter Professional Center, Suite C21 65-1230 Mamalahoa Highway, Kamuela, HI 96743 Tel:(808)885-6762 Fax:(808)885-6011 This article is intended to address issues One Main Plaza, Suite 521 of general interest, is not intended to 2200 Main Street, Wailuku, HI 96793 be construed as legal advice, and does Tel:(808)244-1160 Fax:(808)442-0794 not take the place of consultation with www.ahfi.com qualified legal counsel.
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