Justice proposes requiring contractors to report suspected criminal violations

The Justice Department has proposed to amend the Federal Acquisition Regulation to force contractors to report potential criminal violations of federal law to agency contracting officers and inspectors general.

The proposed rule, filed yesterday by the Civilian Agency Acquisition Council and the Defense Acquisition Regulation Council at Justice's request, would require that companies holding certain types of contracts disclose suspected violations of federal criminal law in connection with the award or performance of contracts, or face suspension or disbarment.

The mandatory disclosure rule would apply to companies engaged in contracts worth more than $5 million and lasting more than 120 days, except for certain contracts for the acquisition of commercial items.

This latest proposal expands on a rule, filed by the same councils in February, that creates a contractor code of ethics and business conduct. Many aspects of the two regulations overlap, but in the most recent rule, the councils stated that they would issue the two final measures separately, because the first one is farther along in the review process but does not address mandatory disclosure.

In recommending the regulatory change, Justice said few companies were responding to invitations to voluntarily disclose suspected violations. Legal and industry experts are expressing some concern, however, over the implementation of the rule.

Among their concerns is the issue of timing. It is unclear whether companies are expected to report violations as soon as they are suspected or after they are internally investigated and proven to be legitimate.

"Part of the conundrum is how much do you have to dig into it and at what point in time do you have to say, 'I don't know what this is, but I'm just going to report it,' " said John Pavlick, partner and contracting specialist with the Washington-based law firm Venable LLP. "If a violation is suspected, do you have an obligation to run it to ground first and then, if it's still suspected, disclose it? Or do you disclose it right away and let them investigate? If it's the latter, I'm afraid we're going to be doing nothing but investigating."

The fine line in contracting law between a civil violation and a criminal violation also is a concern. According to Pavlick, accusations can be framed as administrative, contractual, civil or criminal, depending on intent and interpretation.

Alan Chvotkin, senior vice president and counsel for the Arlington, Va.-based Professional Services Council, agreed that the distinction between types of violations is not well-defined. He cited allegations of overcharging as an example of a violation that could involve anything from an administrative error to a criminal attempt to defraud the government.

"The more successful ethics programs are the ones where the contractor has the opportunity to review and evaluate the nature of complaint, determine if a violation has occurred and then decide what corrective action to take and when and how to disclose to government," Chvotkin said. "We worry that from the government's perspective, they want earlier disclosure, and companies want later disclosure so they can evaluate the nature of the problem.

Both Chvotkin and Pavlick also expressed concern about involving agency inspectors general in the process. Chvotkin said PSC would have to look more extensively into where disclosure reports would be best directed. He said while contracting officers need to be made aware of disclosures, they have no authority or capability to investigate. "IGs get a bad name -- much of it earned -- but I don't know where else you'd send it," Chvotkin said.

Pavlick, however, said he was troubled about sending lots of potential violations to inspectors general. "As soon as you go to the IG, it takes on a life of its own," he said.

The acquisition councils are accepting comments on the proposed rule until Jan. 14.

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