Boeing Kickback Case Underscores Critical Importance of Compliance Programs
Government Contractors Must Be Proactive in Detecting and Addressing Potential Abuse
- Since 2008, amendments to the Federal Acquisition Regulation (FAR) made compliance programs a requirement for all government contractors. The bottom line is that the cost-benefit analysis weighs strongly in favor of having an effective compliance program.
- The overarching goal of an effective compliance program is to prevent and detect misconduct, and once misconduct is detected, that it is dealt with promptly and effectively.
- Boeing did more than just reactively cooperate with the government and the company’s apparently proactive self-disclosure yielded a positive reaction from the Department of Justice.
In the words of F. Scott Fitzgerald, "Show me a hero and I'll write you a tragedy." When the hero of the day is a company's compliance program, it's almost a surefire bet that a tragedy is being written. But at the same time, to the extent the compliance program is doing what it is supposed to do, there's a success story in the works. In the case of Boeing's Space and Intelligence Systems (BSIS) unit in El Segundo, Calif., the media has focused on the newsworthy details of an illegal kickback scandal. Just as important, however, is the fact that this scandal's coming to light is a compliance program success story in itself.
The Government Contracts Kickbacks Case
On April 2, 2015, the U.S. Department of Justice (DOJ) announced that seven persons have been charged in a scheme to pay hundreds of thousands of dollars in kickbacks to a procurement official at a subsidiary of the Boeing Company.1 According to the government, the key player in the scheme is an executive at a local metal company that was a subcontractor to BSIS, which supplies satellites and satellite parts to NASA, the Department of Defense, the National Reconnaissance Office and the U.S. Air Force.2 The metal company executive (vice president of A&A Fabrication and Polishing, Inc.) was arraigned on a 15-count grand jury indictment that also charges A&A.3
From the DOJ news release, the charges in the indictment concern the kickback scheme and the conspiracy to carry it out. In particular, the purchase orders (POs) at issue were supposed to be awarded on a competitive basis. But instead, a subcontractor paid kickbacks to a Boeing procurement officer and received confidential information which gave it a competitive advantage, leading to the award of several POs. Boeing ceased to do business with this subcontractor after experiencing quality and performance issues. Not to be deterred, the offending subcontractor thereafter operated through a "front" company, and the scheme continued. All told, the federal indictment identified kickbacks of roughly $750,000 and related to $4.5 million in POs between 2005 and 2012. To date, seven defendants have been charged, four of whom have already pleaded guilty, including the Boeing procurement officer who received the kickbacks, according to DOJ.
Boeing Compliance Program Uncovers the Scheme
In announcing the case, DOJ made it clear that "Boeing cooperated fully in the investigation."4 But the company did more than just reactively cooperate with the government – Boeing proactively self-disclosed the misconduct after its compliance program uncovered the scheme.
In recent years, Boeing has tightened its internal ethics and compliance rules following a civil settlement with DOJ in a separate matter in which the company allegedly obtained documents from a competing company. This ramped-up compliance program detected the fraud. According to press reports, Boeing said it "discovered the scheme involving Allen after receiving a tip from its internal ethics system."5 The company launched an internal investigation and later alerted government officials that it suspected an employee was receiving kickbacks.6 "Boeing has zero tolerance for such conduct," the company said in a statement.7
An Ounce of Prevention Is Worth a Pound of Cure
Much has been written and said about the business case for having an effective compliance program, especially since 2008 amendments to the Federal Acquisition Regulation (FAR) made compliance programs a requirement for all government contractors.8 The bottom line is that the cost-benefit analysis weighs strongly in favor of having an effective compliance program.
In a nutshell, the overarching goal of an effective compliance program is to prevent and detect misconduct, and once misconduct is detected, that it is dealt with promptly and effectively. That means the program cannot exist only on paper. It has to be implemented such that the commitment to doing business ethically is part of a company's culture and is reinforced from the top of the organization and integrated at every level below. By leaning forward this way, a company is in a position to get ahead of problems and address them when they arise – rather than deal with them reactively after they have festered.
The FAR's express reference to detecting fraud as a core compliance program objective is an acknowledgement by the government that misconduct can and will occur, even in the best of organizations. While contractors are required to take appropriate preventive measures such as providing training and developing appropriate internal controls, they are not expected to produce a perfect incident-free scorecard. To the contrary, effective compliance programs accept that misconduct will occur and establish proactive measures for discovering misconduct and investigating and addressing it promptly.
The Boeing case illustrates how crucial it is to have an effective compliance program and, moreover, how critical it is to properly investigate when wrongdoing is alleged and to take the required actions where instances of improper conducted are identified. This is what separates companies that are touted in DOJ press releases as cooperating fully with the government from those who find themselves among the list of the indicted.
What Is the Status of Your Company's Compliance Program?
It is undoubtedly a best practice for companies to be proactive in making certain that their compliance programs are where they need to be. The following questions are a good start to analyze the status of your compliance program:
- Is your company's compliance program effective? Can it be more effective? How?
- Do you review your compliance program on a regular basis to ensure it remains effective in light of the changing circumstances in your company and in the law?
- Does your company have effective reporting mechanisms in place (i.e., a hotline)?
- Is your company equipped and prepared to investigate reports of suspected instances of improper conduct when they occur, as Boeing did?
- For more information about internal investigations, see the following Holland & Knight publications:
- "SEC Enforcement Action Puts Publicly-Traded Contractors’ Internal Investigation Policies in the Crosshairs," Government Contracts Blog, April 2, 2015
- "D.C. Circuit Upholds Attorney-Client Privilege in Internal Investigations," Government Contracts Alert, June 30, 2014
- Is it prepared to act as required, including making the required disclosures to the government, if there is credible evidence that a principal, employee, agent, or subcontractor has committed a violation of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 U.S.C. or a violation of the civil False Claims Act (31 U.S.C. 3729-3733), including as mandated by FAR Clause 52.203-13, Contractor Code of Business Ethics and Conduct?
Holland & Knight's Compliance Services Team and our Government Contracts Group can assist your company in reviewing all aspects of your compliance program, including reporting mechanisms, investigation procedures and options, and disclosure requirements.
*This article was subsequently published in Law360.
5 “Boeing Employee Pleads Guilty to Taking Kickbacks for Bid Information,” Reuters, 4/2/2015
8 See, e.g.,Practicing Law Institute, Corporate Compliance Answer Book 2014, Volume 1, Chapter 1, The Business Case for Compliance Programs, Christopher A. Myers and Michael Manthei.
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.