Contractor reports of violations flowing into Defense IG’s office

Since a controversial rule requiring contractors to disclose their own criminal contracting violations went into effect in mid-December, the Defense Department's inspector general has received more than 50 disclosures.

Lynn McCormick, program manager for the Defense IG's contractor disclosure program, said her office has received 56 reports of violations, the majority of which have been resolved through administrative action such as contract and billing adjustments. Fewer than 10 have been referred to investigative agencies, she said.

Most of the disclosures -- which came primarily in the mail from outside counsel, rather than through the IG's online submission portal -- relate to inaccurate labor charges, according to McCormick and Frank Albright, director of policy and programs at the IG's Office of Investigative Policy and Oversight.

"The preponderance have been related to single employee misconduct, say where someone was found not to have shown up to work or to have erroneously billed to one contract instead of another or the employee was found surfing the Internet for three or four hours a day for the last three months, or something like that," Albright said. "So they have to adjust the billing in order to credit the government back for that employee's labor time."

McCormick has added staff to handle the disclosures but, according to Albright, some of the greatest challenges lie outside their office. They must brief the Justice Department on disclosures, and McCormick and her staff must coordinate with a massive bureaucracy to determine what response is appropriate.

"The biggest job for us, because the Defense Department is so big, is to adequately coordinate for each one of these," Albright said. "The buying agency may be in one component and the contract administrative office may be somewhere else and, of course, the investigative agency is owned by another component, and it's all coordinated with the Justice Department. So trying to reach consensus on all of these and coordinating them is what drives our work, and thus the need for additional resources."

Robert Burton, a Venable Government Contracts Group partner who served two terms as acting administrator at the Office of Federal Procurement Policy, was surprised by how many disclosures the Defense Department has received. "Because this is a mandatory requirement and there are significant ramifications if you fail to comply, there may be some instances where contractors are just covering themselves. They're not really sure if they should report or not, but they want to be careful so they err on the side of disclosure," Burton said.

He said caution is not all bad, but Burton urged companies that are unsure to consult outside counsel for advice to spare the inspectors general, contracting officers and the Justice Department excessive frivolous disclosures.

Lorraine Campos, a partner in Reed Smith's Government Contracts Practice, said she has seen her clients beef up their compliance programs and establish procedures to review actions that could merit disclosure. "We're seeing more compliance activity, as well as disclosures made to the government," she said. "I think contractors are taking this seriously."

Campos and Burton agreed a strong ethics and compliance program is not just mandatory under the rule, it's crucial when filing a disclosure. Reviewers undoubtedly will take into account the strength of the company's ethics program, they said, as well as any corrective action that has been taken.

"If they have a robust ethics and compliance program in place, it will mitigate the results," Burton said. "The whole idea here is to get contractors to do this type of thing on their own and to take corrective action, which will mitigate the government's remedial actions, there's no question about it."

Albright said the inspector general's office has been participating in forums, including one sponsored by the American Bar Association, to get the word out about the reporting requirements and answer questions from contractors and their lawyers. Many of the legal ambiguities contractors were concerned about during the rule-making process are being sorted out, Campos said.

"It's not perfect. There still are a lot of vague aspects to it, and I think it's still too early to tell if it's been a resounding success or a disaster," she said. "But things seem to be flowing pretty smoothly."

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