Much-derided overseas contracting loophole to be closed

A so-called "mystery loophole" exempting companies overseas from a proposed rule requiring U.S. contractors to report fraud is neither mysterious nor likely to become final, according to some administration officials.

Drafted last year by the Federal Acquisition Regulatory Council, a part-time intergovernmental group chaired by the Office of Management and Budget, the rule mandates that federal contractors create programs to find and report fraud on contracts worth $5 million or more. But a provision exempting contractors operating abroad has caused controversy.

The Justice Department has urged dumping the exemption, a position reiterated last week by Attorney General Mukasey. Sen. Claire McCaskill, D-Mo., has blasted the loophole and Sen. Charles Grassley, R-Iowa, has pushed a budget amendment aimed at killing it.

House Oversight and Government Reform Chairman Henry Waxman, with Reps. Peter Welch, D-Vt., and Edolphus Towns, D-N.Y., last month asked OMB and other agencies to turn over documents by Friday on how the rule was drafted.

"Who snuck this in at the 11th hour and why?" asked Welch, who plans to introduce a bill to eliminate the exemption.

But such speculation "gives us way too much credit," said a senior acquisition official. "This is not a conspiracy and there is no big mystery," argued the official, a nonpolitical employee not authorized to comment publicly.

The proposed rule was drafted free of high-level or industry pressure by the FAR Council's acquisition law team, a group of about 10 career officials from across government who work part-time for the council, the official said.

According to OMB, the group included the exemption because they based their draft on a decades-old Defense Department rule that also exempts overseas contractors.

"It just wasn't that intentional," the senior official said. "Sometimes regulations are drafted imprecisely."

Alan Chvotkin, executive vice president of the Professional Services Council, a contractor trade group, said the overseas exemption responds to the difficulty contractors would face imposing U.S. ethics standards on foreign subcontractors. Chvotkin said his group asked the FAR Council to use the Defense Department language, but did not specifically request the overseas exception.

Congressional critics observe that OMB added the exemption to language proposed by the Justice Department. But Justice left the specifics to OMB.

"The attached outline prepared by our prosecutors merely suggests the recommended language," Assistant Attorney General Alice Fisher wrote in a May letter asking OMB to draft the rule.

The proposal is one of two recent contracting rules that exempt overseas companies. The second, finalized Nov. 23 without drawing attention, requires contractors to create ethics programs. It contains a similar exception.

The senior acquisition official suggested both loopholes could be discarded.

The exemption "doesn't necessarily make a lot of sense," said the official. "We are definitely going to take a look."

Keith Ausbrook, counsel for the House Oversight and Government Reform Committee's Republicans, who often criticize Waxman's investigations, said the public review process is working.

"It may not be the right policy ... but that's what proposed rules are about," Ausbrook said. "You put the thing out and people comment."

"It's completely public," he added. "Is somebody trying to hide something here? It's right there."

For an in-depth look at the push to require federal contractors to report possible criminal violations of federal law, see "Turn Yourselves In" by Elizabeth Newell in the April 2008 issue of Government Executive.

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