Rule would require contractors to vet employees for conflicts of interest

Federal contractors performing work closely associated with inherently governmental functions would have to vet their employees for potential conflicts of interest, according to a proposed rule published Friday in the Federal Register.

The notice, in the works for more than 18 months and later mandated by language in the 2009 Defense Authorization Act, is the government's first attempt to codify procedures for eliminating and preventing personal conflicts of interest among contractor employees.

But the burden for enforcing the rule -- written by the Civilian Agency Acquisition Council, Defense Acquisition Regulations Council and the Office of Federal Procurement Policy -- is placed almost exclusively on the contractor.

The company would be required to inform covered employees of their obligation to disclose and prevent "even the appearance of personal conflicts of interest." To enforce the rule, the contractor would be required each year to obtain, maintain and update financial disclosure statements from each covered employee assigned to a task under the contract.

The disclosure statement would spell out all personal conflicts of interest the employee could face in impartially executing the contract, including the financial assets of the worker or their close family members. The rule stipulates a host of financial connections that must be disclosed, including salaries, consulting relationships, research funding, stocks and real estate. Other potential sources of conflicts of interest could include gifts, travel or prospects of future employment.

A clause attesting that the contractor will conduct the required vetting would be included in all covered solicitations, contracts and task or delivery orders.

If a personal conflict of interest disclosure is made before an employee begins work on a contract, the company would not be required to report its findings to the government, the rule said.

But violations found after work has started must be reported to the contracting officer, along with any disciplinary actions taken by the contractor against the noncomplying employee. The agency's contracting officer then would have the authority to decide if the contractor's action is sufficient.

A waiver to the rule could be authorized if an agency's senior procurement official determines in writing that it's "in the best interest of the government."

Contractors that do not comply with the rule would face possible loss of payments or award fees, contract termination, suspension or debarment, the notice said.

The new rule would apply only to contracts with "acquisition functions closely associated" with inherently governmental work. These would include service contracts in which the agency outsources the planning of the acquisition, developing or approving contractual documents, evaluating proposals and administering or auditing contracts.

As part of its governmentwide review of federal contracting, the Office of Management and Budget currently is working on guidance that would more clearly define inherently governmental functions and govern how agencies should administer such work. The guidance is expected sometime before the end of the year.

The councils suggested that the rule would apply to roughly 250,000 contractor employees from about 10,000 companies. The proposal, however, does not cover organizational conflicts of interest. That issue, which was the subject of an advance notice of proposed rule-making in the Federal Register in March 2008, could be addressed at another time, the notice said.

In what could become the most debated clause of the new rule, contractors also would be required to prohibit covered employees who have access to "nonpublic government information" from using it for personal gain.

Alan Chvotkin, vice president of the Professional Services Council, a trade association for service contractors, said the clause has the right intent but the wrong implementation.

"You are asking employers to regulate the behavior of their employees outside the workplace," he said. "That may be impossible for contractors to regulate."

Chvotkin suggested that the burden for complying with the clause should rest with the individual, rather than the company. The trade association plans to issue formal comments to the rule in the coming weeks.

PSC said it supports the construct of the rule, allowing contractors, rather than the government, to identify and regulate conflicts of interests among employees. Chvotkin, however, worries that the burden imposed on contractors might be unfairly steep.

For example, prime contractors would be responsible for ensuring that subcontractor employees comply with the regulation. Chvotkin suggests that each company should be responsible for policing the behavior of its own employees.

Comments on the rule are due by Jan. 12, 2010.