Rethinking Procurement Integrity Contractors Must Protect Themselves Through Compliance
 
April 15, 2003
 
Richard O. Duvall- Northern Virginia

Procurement ethics span many areas of law, including criminal law (which bans, for example, bribes and gratuities), civil fraud laws (some of which impose severe penalties for government contracts fraud), and ethics rules for government employees.  Under the Federal Acquisition Regulation (FAR), Part 3 covers improper business practices and personal conflicts of interest.  These systems of rules contribute directly to procurement ethics and to the “cleanliness” of the procurement system.

However, procurement ethics are grounded in the day-to-day reality of the procurement process.  The rules governing procurement ethics thus reflect endless legal, moral and political compromises.  Procurement ethics rules are akin to a metamorphic rock formed by the pressures of colliding norms and conflicting rules.  As a result, the procurement integrity rules are startlingly complex, and require careful review for compliance.

Criminal Sentencing Guidelines Are Critical Guides to Compliance

When contractors establish procurement compliance programs, they should begin with the criminal laws.  The U.S. Sentencing Commission’s Sentencing Guidelines for criminal defendants explain that, if a corporation wants to reduce its sentencing exposure in the event of a criminal conviction, the corporation should have a compliance program in place that meets the following criteria: 

An “effective program to prevent and detect violations of law” means a program that has been reasonably designed, implemented, and enforced so that it generally will be effective in preventing and detecting criminal conduct. . . .   The hallmark of an effective program to prevent and detect violations of law is that the organization exercised due diligence in seeking to prevent and detect criminal conduct by its employees and other agents. Due diligence requires at a minimum that the organization must have taken the following types of steps:

1.         The organization must have established compliance standards and procedures to be followed by its employees and other agents that are reasonably capable of reducing the prospect of criminal conduct.

2.         Specific individual(s) within high-level personnel of the organization must have been assigned overall responsibility to oversee compliance with such standards and procedures.

3.         The organization must have used due care not to delegate substantial discretionary authority to individuals whom the organization knew, or should have known through the exercise of due diligence, had a propensity to engage in illegal activities.

4.         The organization must have taken steps to communicate effectively its standards and procedures to all employees and other agents, e.g., by requiring participation in training programs or by disseminating publications that explain in a practical manner what is required.

5.         The organization must have taken reasonable steps to achieve compliance with its standards, e.g., by utilizing monitoring and auditing systems reasonably designed to detect criminal conduct by its employees and other agents and by having in place and publicizing a reporting system whereby employees and other agents could report criminal conduct by others within the organization without fear of retribution.

6.         The standards must have been consistently enforced through appropriate disciplinary mechanisms, including, as appropriate, discipline of individuals responsible for the failure to detect an offense. Adequate discipline of individuals responsible for an offense is a necessary component of enforcement; however, the form of discipline that will be appropriate will be case specific.

7.         After an offense has been detected, the organization must have taken all reasonable steps to respond appropriately to the offense and to prevent further similar offenses—including any necessary modifications to its program to prevent and detect violations of law.

U.S. Federal Sentencing Guidelines, § 8A1.2. Application Instructions—Organizations.

The Defense Federal Acquisition Regulation Supplement (DFARS), and the procurement codes for the Department of Veterans Affairs (VA) and the Environmental Protection Agency (EPA), have incorporated the Sentencing Guidelines’ standards into a checklist for contractor compliance.  Under all three rules, contractors are expected to have a compliance program in place that includes the following:

• a written code of ethics, and an ethics training program
• periodic reviews of business practices and procedures
• a mechanism, such as a hotline, to allow and encourage employees to report misconduct
• internal and/or external audits
• disciplinary actions for misconduct
• timely reporting to the government of misconduct
• full cooperation with any government investigation or action

As a practical matter, any contractor – whether working for the DoD, the VA or the EPA – should have a compliance program of this type in place.  A compliance program ultimately protects any contractor on a number of fronts, including criminal, procurement integrity, civil fraud and lawsuits by competitors and former employees.  Selling into the federal market without a compliance system is just too risky.

No Other Way to Tackle Complex Rules of Procurement

A procurement system as complex as ours demands careful compliance training.  The current procurement ethics system, is the result of rule piled upon rule over an extended period of time as Congress and regulators responded to various scandals.  Although the rules have been streamlined over the past several years, they remain remarkably complex, if for no other reason than their sheer comprehensiveness. 

The complexity of the rules has meant that few fully comprehend them.  A typical employee may not know whether he or she can give a government employee a meal (which may be illegal) or a snack (which may not be illegal).  Does a doughnut, for example, constitute a meal or a snack?  Procurement professionals ask these critical questions every day, but all too few in the procurement system genuinely understand the answers, because of the system’s complexity.

Need for Procurement Compliance More Acute Now

Procurement compliance is a more pressing concern now because of the flood of new participants in the federal marketplace.  Over the last decade, Congress passed massive reforms to the federal procurement system, many of which made it much easier and simpler to sell to the federal government.  The new laws had the practical effect, though, of bringing many new entrants to the federal market – most of whom simply do not have compliance programs in place.

Often, however, firms new to the federal market, such as those with General Services Administration (GSA) schedule contracts, lack the knowledge of how to structure their compliance programs.   Thus, they end up fending for themselves in procurement integrity, and too often have little guidance on how to do so.

Traditional domestic content (“Buy American”) requirements are being lowered or dropped by the United States, so the situation is compounded by the many new foreign firms that have entered the marketplace.  The presence of these foreign firms has resulted in a procurement community swelling with new entrants who simply do not know the rules.

Another factor contributing to the risk was a shift in the government’s acquisition workforce.   During the last decade of reforms, thousands of the government’s acquisition workforce were eliminated.   The Defense Department, for example, has reduced its civilian acquisition workforce by half.   Therefore, fewer personnel remain in the agencies who understand procurement integrity.  The situation will likely worsen as the remaining acquisition workforce ages into retirement.  That situation could become even worse if the departing government employees are replaced by private contracting personnel – which grows increasingly likely with the shift toward outsourcing.

Needed Solution:  Procurement Compliance Training Now

In a recent presentation to the U.S. Office of Management and Budget at the White House Conference Center, co-author Chris Yukins* offered some recommended actions for the government, to close this growing gap in procurement compliance, namely: 

• codifying the compliance requirements applicable to all contractors, as the Defense Department and other agencies have done in their procurement regulations
• offering, as published “best practices,” some guidance to flesh out the skeletal compliance requirements currently set forth in the regulations and in the Sentencing Guidelines
• retooling government training to make it relevant to private contractors, and offering that training through inexpensive channels, such as e-learning available across the Internet

Simply tightening enforcement, or streamlining the rules, will not be enough.  The key is to encourage contractors to implement effective compliance systems.

At the end of the day, compliance helps the country as well as the contractor.   By fulfilling their compliance obligations through training and by following the procurement integrity rules, contractors will ensure the public’s confidence in the integrity of the U.S. procurement system.

For more information, call Richard O. Duvall, toll free, at 1-888-688-8500.

* Chris Yukins is an associate professor of Government Contract Law at George Washington University Law School, and is Of Counsel to Holland & Knight LLP.