Overviews of: The Business Systems Rule The UK Bribery Act Charles D. Chadwick DII Best Practices Forum June 23, 2011

Business Systems Rule (The Original Rule) Proposed rule to amend the DFARS issued on January 15, 2010 Defined contractor business systems as accounting systems estimating systems purchasing systems earned value management systems (EVMS) material management and accounting systems (MMAS) property management systems Contractor has 30 days to respond to an alleged deficiency Would allow ACO to withhold a percentage of payments when ACO makes final determinations that a contractor's business system contains deficiencies. Payments could be withheld on Interim payments under cost reimbursement contracts Incentive type contracts Time-and-materials contracts and Labor-hour contracts Progress payments Performance-based payments

Business systems (the withhold details) Initial withholding set at 10% of requested payments If multiple business systems have deficiencies, total withholding cannot exceed 50% of payments Can be reduced to 5% (per system) if acceptable Corrective Action Plan in place but Contractor has not completely corrected deficiencies If Contractor fails to follow plan, ACO can restore the 10% withholding If ACO determines that one or more system deficiencies are highly likely to lead to improper contract payments being made, or represent an unacceptable risk of loss to the Government, ACO will withhold up to 100% of payments until ACO determines that the Contractor has corrected the deficiencies.

DOD response to initial comments 350 comments were received on the proposed rule Rule would not be withdrawn, but would be modified Agreed rule should require a causal relationship between the deficiency and the risk to the Government Acknowledged that proposed rule was binary on the 10% withhold and that needs to be changed Agreed rule needs to address delays in DCAA/DCMA responses to a corrective action plan Definitions in the rule need to be clarified, particularly what constitutes a “deficiency”

Second Proposed Rule Issued December 2010 Withhold reduced to 5% (2% for small businesses) on contracts over $50M and a cap of no more than 20% (10% for small businesses). With an acceptable correction plan, the contracting officer may lower the withhold to 2% (1% for small businesses). FAR Part 12 (Commercial items) contracts are generally exempt from the requirement. Removal of the withhold does not require a final audit, if the contactor can provide evidence that deficiencies have been corrected. The definition of “deficiency” used throughout the rule has been defined to mean a failure to maintain one or more system criteria of an acceptable business system. System criteria for each of the business systems have been provided in various parts of the rule.

Second Proposed Rule CO, in consultation with the auditor or functional specialist must determine the acceptability of the contractor's business systems and approve or disapprove the system. COs will promptly approve a previously unapproved business system when contractor has substantially corrected the system deficiencies, removing any potential risk of harm to the government. The revised rule did not exempt cost type contracts. It also did not address concerns with the correlation of the withhold to risk (does the deficiency put the Government at risk) and to materiality, Did not address industry comments on the necessity for the rule at all in light of existing regulatory coverage

The Interim Rule (Significant Changes) Issued May 18, 2011 The amount of any withhold has been reduced to 5% with a cap of no more than 10% when there is withholding on multiple systems. Changed definition of “significant deficiency,” in accordance with the 2011 DOD Authorization Act, to be “a shortcoming in the system that materially affects the ability of officials of the Department of Defense to rely upon information produced by the system that is needed for management purposes.” Therefore, there is a materiality provision previously lacking in the rule. Applies only to contracts that are subject to CAS vice contracts over $50M The Contracting Officer must provide, in an initial written determination, a description of each significant deficiency in sufficient detail to allow a contractor to understand the problem

Interim Rule (Significant Changes) If a significant deficiency exists after a CO's evaluation of the contractor's response to an initial determination of significant deficiency, requires a CO's final determination to include a disapproval of a contractor business system and the withholding of payments Requires a payment withholding to be reduced by at least 50 percent if a CO has not determined, within 90 days after notice of corrective action by the contractor, whether the contractor has corrected significant deficiencies or if there is a reasonable expectation that corrective actions have been implemented Comments on the interim rule are due July 18, CODSIA has challenged the issuance of the rule as an interim rule since interim rules are intended to be used only when there is an urgent need.

UK Bribery Act: The “Big Picture” Passed in April 2010; takes effect from 1 July 2011 Act criminalizes commercial bribery; bribery of domestic and foreign government officials; receipt of a bribe; and failure by a corporate entity to prevent bribery. Applies to all UK organizations, UK citizens, and businesses that conduct any part of their business in the UK

UK Bribery Act: The “Big Picture” No exception for facilitation payments There is a strict liability standard for organizations There is a complete defense to strict liability if an organization has “adequate procedures” to prevent bribery Penalties include unlimited fines for organizations and individuals and up to 10 years in prison for individuals

Jurisdiction Broader jurisdiction even then the US FCPA The Act applies when bribery is committed in the UK is committed by a UK organization or citizen anywhere in the world is committed by a non-UK organization that conducts any part of their business in the UK even if the bribe does not happen in the UK “Conducts business” can mean employees working in the UK or selling goods and services in the UK How will the SFO apply its potentially broad jurisdiction?

What is a “bribe”? According to the Act a “bribe” is when a person offers, promises or gives another person a “financial or other advantage” to induce improper performance of a function or reward improper performance of a function or where acceptance would itself constitute improper performance There are reciprocal offenses for soliciting or receiving bribes Does not need to be offered directly and includes bribes to private parties There is no exception for facilitation payments to expedite routine government actions as in the FCPA

What is a “bribe”? Bribery of foreign government officials does not require actual improper performance does requires that the official not be “permitted or required by written law…to be influenced in [the official’s] capacity as a foreign public official by the offer, promise or gift”. e.g., (from the official “Guidance”): “where local planning law permits community investment or requires a foreign public official to minimise the cost of public procurement administration through cost sharing with contractors, a prospective contractor’s offer of free training is very unlikely” to fall within the Act It is also an offense for an organization to fail to prevent a bribe by an “associated person”

Some fine points of usage The “Guidance” (not the Act) also says, “Bona fide hospitality and promotional, or other business expenditure which seeks to improve the image of a commercial organisation, better to present products and services, or establish cordial relations, is recognised as an established and important part of doing business and it is not the intention of the Act to criminalise such behaviour.” “Reasonable and Proportionate” is the standard cited by the “Guidance” Corporations are subject to strict liability for an offense under the Act Prosecutorial discretion Consideration of the “public interest” is often invoked in the “Guidance” Corporations will have a complete defense if it can demonstrate that it had “adequate Procedures” in place to prevent associated persons from violating the Act

Adequate Procedures The “Guidance” states that there are six principles for such procedures Proportionality [to the bribery risk the organization faces and the nature, scale and complexity of the organization’s activities] Top-level Commitment Risk Assessment [nature and extent of exposure to internal and external risk of bribery on its behalf] Due Diligence [means of risk assessment and risk mitigation and including employees] Communication [of bribery policies and procedures to employees and third parties, including training] Monitoring and Review [for effectiveness of procedures and changes in external influences]