The proposed rule requires a contractor to notify the Office of Inspector General (IG) whenever it has “reasonable grounds to believe” a criminal violation has occurred. Penalties for non-disclosure are suspension and even debarment – the proposed rule would add two newly stated types of contractor omissions to the lists of causes for suspension or debarment under FAR 9.407-2 and 9.406-2, so long as the existence of the omissions is based upon “a preponderance of the evidence”:
- A “knowing failure” to “timely” disclose an “overpayment” on a government contract
- A “knowing failure” to “timely” disclose a “violation of Federal criminal law in connection with the award or performance of any Government contract or subcontract”
The proposed rule includes no definition of “timely.” This raises additional questions:
- When does a necessary disclosure become late?
- Is the contractor entitled first to consult with its legal counsel, its cost accounting expert and others, and self-investigate the situation before it concludes that there has been an “overpayment” or a “violation of Federal criminal law?”
- And if the contractor does not have such professionals on its corporate staff or in an outside firm with a history of work for the company, how much time would be afforded the contractor to seek such professional assistance?
- When is a failure to disclose “knowing?” Who decides? What about reasonable disagreements over whether there has been a violation?
There is no definition of “overpayment.” Federal contracts have many pricing methods and systems for interim or provisional payments. Does an “overpayment” occur when a provisional payment such as a cost-reimbursement voucher is paid, even though the final amount for that voucher as determined at the end of the contract might be higher or lower than what the contractor had claimed for that voucher? Has an “overpayment” occurred when payment dollars pertaining to one line item appear to be excessive, but another line item was shortchanged by the government disbursing office in the exact same amount? These questions are not answered by the plain language of the proposed rule.
Moreover, irrespective of the wording in this proposed rule, the entire notion of mandatory disclosure runs counter to many established government processes. For example, unlike most of the compliance program elements required by the new rule, mandatory self-disclosure is not an element of a compliance program under the USSG. Rather, voluntary self-disclosure is one factor in the mitigation of a company’s culpability under the USSG.
Mandatory self-disclosure is also at odds with the DOJ’s own corporate-charging guidelines for its federal prosecutors. The McNulty Memorandum, issued December 12, 2006, by then-Deputy U.S. Attorney General Paul McNulty, specifically states that “prosecutors must consider” in their charging decision “the corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents.”4
Nor does the Defense Acquisition Regulation Supplement (DFARS) require reporting suspected violations straight to the IG level. Rather, the DFARS states that a “contractor’ssystem of management controls should provide for … [t]imely reporting to appropriate Government officials of any suspected or possible violation of law in connection with Government contracts.”5 Thus, where appropriate, contractors may make a voluntary disclosure to the contracting officer, the program manager, the contract administrator or some combination thereof. The IG may be notified, but need not be unless appropriate.
More broadly, requiring disclosures to the agency IG would seem to defeat the concept of ameliorating possible irregularities. Once the IG has become involved, both the contracting officer and the contractor or subcontractor may lose control of the investigation into what went wrong on the contract and what entity was responsible. It does not seem to be good policy to require immediate reporting to an IG office at the outset of the contractor’s developing the threshold “reasonable grounds to believe” – a phrase which could have varying interpretations and is a lower standard than “probable cause.” It could be based upon completely unevaluated or investigated allegations, rumors and suspicions. The existing voluntary disclosure protocols, in contrast, allow for internal investigation by the reporting parties before a disclosure is made.
Other federal agencies also currently have provisions encouraging voluntary self-disclosure. For example, the HHS-OIG’s Provider Self-Disclosure Protocol was implemented in October 1998 to assist health care providers in investigating and reporting potential violations of federal health care laws. The program presents providers with an opportunity to police themselves, correct underlying problems and work cooperatively with the government to resolve any matters of concern.
Perhaps the biggest concern about mandatory disclosure – with looming penalties of suspension and debarment – is that it will inhibit “good” companies from entering the federal market, while likely leading to only marginally more reporting, if any. With a voluntary disclosure system, the “good” companies will naturally disclose concerns to authorities, whereas the “bad” companies will not. With mandatory disclosure, however, the “good” companies will still disclose – because it is required – and the “bad” companies still will not disclose. Plus, the threat of suspension and debarment and the potentially massive costs of responding to an investigation will keep some “good” companies from bidding on government contracts in the first place.
Thus, in order to maintain consistency with other federal agencies and the USSG’s widely known compliance program elements, and to keep ethical companies from being scared away by business-killing penalties, the Councils would be wise to consider a voluntary disclosure program instead.