ETHICS, CONTROLS AND DISCLOSURE: EXPLORING THE NEW FINAL RULE Robert J. Sherry K&L Gates Dallas, TX / San Francisco, CA December 3, 2008

1 OVERVIEW  Introduction  Three Major Components of Revised FAR Coverage  Code of Ethics/Conduct  Internal Controls  Disclosure Obligations  Other Features of the Final Rule  Critical Sample Issues  Conclusion

2 INTRODUCTION  Final Rule: 73 Fed. Reg (November 12, 2008)  Effective Date: December 12, 2008 (but see later comments)  Genesis:  2007 DOJ request to OFPP for additional regulation  “Close the Contractor Fraud Loophole Act” (enacted 2008)  Principal Impacts:  Mandatory internal controls for certain contractors/subcontractors  Disclosure obligations if “credible evidence” exists of certain violations of law  New causes for debarment/suspension relating to failures to disclose

3 REVISED FAR COVERAGE  Code of Ethics/Conduct  Now required for commercial item contracts/subcontracts (and all other contracts/subcontracts containing FAR )  To be inserted in contracts/subcontracts over $5M, performance period of 120 or more days  Effective 30 days after contract award (unless CO agrees to later date)  Obligations:  Code of Ethics/Conduct  “Make available” to each performing employee  “Due diligence” to prevent/detect criminal conduct  “Promote compliance” with code

4 REVISED FAR COVERAGE  Internal Controls  Not required for commercial item contracts/subcontracts  Effective 90 days after contract award (unless CO agrees to later date)  Previous regulation: internal control “examples”  Final rule: “Minimum requirements” in  Ethics awareness/training  High-level oversight/adequate resources  “Reasonable” efforts -- “compliant principals”  Periodic compliance reviews  Anonymous or confidential “hotline” (or similar mechanism)  Disciplinary action for improper conduct  Timely disclosure to IG/CO of specified legal violations  Disclosure obligation lasts until three years after final payment  Cooperation with government reviews

5 REVISED FAR COVERAGE  Disclosure Obligations  Applies to all contracts/subcontracts for three years after final payment  Two sources:   Revised debarment/suspension regulations  What must be disclosed? “Credible evidence” that a principal, employee, agent or subcontractor has committed  Certain criminal violations -- fraud, conflicts of interest, bribery, gratuities  Civil False Claims Act violations  Also must disclose “significant overpayments” (other than contract financing overpayments)  To whom is disclosure made? See FAR :  Agency IG  Copy to CO  If GWAC or similar contract, to “ordering” and “contracting” agency IGs  Some agency IGs are beginning to develop disclosure protocols

6 OTHER FEATURES OF THE FINAL RULE  FAR modifications  “Integrity and business ethics” now past performance information  Cause for debarment: “knowing failure” by principal to disclose “credible evidence” of violation (preponderance standard)  Cause for suspension: same, but “adequate evidence” standard  Modifications of FAR clause to reflect changes discussed earlier regarding code, controls, disclosure

7 SAMPLE CRITICAL ISSUES  Initial thoughts -- more to come/evolve  Commercial item contract status -- another reason to accept only commercial item contracts/subcontracts if feasible  To disclose or not to disclose?  Balancing investigatory conclusion (no violation) vs. more aggressive government view  What is “credible evidence”?  What “overpayments” must be disclosed?  E.g., in GSA contract context, must you disclose potential IFF underpayments/price reduction clause violations?  What will COs do with information?  Increase in nonresponsibility determinations?  Past performance evaluation issues

8 CONCLUSION  Standards in final rule -- subject to evolving interpretation  Examine existing code of ethics/conduct  Examine internal controls  Examine completed investigations for “open” contracts  Other “open” contract issues?

9 QUESTIONS?  Bob Sherry (214) (415)