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   HBizlaw 2008

A New Program to Implement Old Obligations

      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
     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
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                                                                                                       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
morning meeting in the contractor’s business office could be permissible.
However, a more generous offering of sandwiches and drinks could be
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
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  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.

                                                                                                      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
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                                Tel:(808)885-6762 Fax:(808)885-6011                              This article is intended to address issues
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                                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
                                                                           qualified legal counsel.

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