Understanding Federal Contract Compliance Breakout Session # E03 Vincent J. Napoleon, Partner, Nixon Peabody LLP D. Grayson Yeargin, Partner, Nixon Peabody LLP Tuesday, July 29, 2014 2:30 p.m.–3:45 p.m.

Government Contracting Overview • U.S. Government Contracting – A Daunting Task – Significant complexities – Highly regulated • Spending Trends – Government spending 5X inflation rate after 9/11

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Government Contracting Overview • Spending Trends – Increased focus on: • National Security • Executing the war on terrorism • Stimulus demands • Need for economic recovery − Consistent decline in spending in FY 2011 ($539B), FY 2012 ($517B), and FY 2013 ($459B)

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Federal Contract Spending Trend

Source: USA Spending

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Government Contracting Overview • The federal government’s concern with procurement fraud continues to increase, prompting government contractors to develop compliance programs.

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Government Contracting Overview • Improper influence in government decisions – Bribery, gratuities, and kickbacks – Lobbying – Covenant against contingent fees – Conduct of employees

• Dishonesty in dealing • Improperly obtained information 6

Government Contracting Overview • Ensuring current, accurate, and complete information between contractors and the government • Protecting data so it is not disclosed to foreigners • Safeguarding against criminal conduct in government contractor interactions

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Government Contracting Overview • A government contractor’s failure to meet his/her compliance and ethics obligations can result in significant consequences, ranging from breach of contract claims, suspension, debarment, and civil and criminal penalties (including prison and fines).

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Designing an Effective Compliance Program • Having an effective compliance program can limit exposure if an employee engages in criminal or unethical conduct. • In an investigation, enforcement authorities will look at whether a company has a compliance program that meets FAR and U.S. Sentencing Guideline requirements.

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Designing an Effective Compliance Program • Studies have shown that implementing a robust ethical compliance program can lead to increased employee satisfaction, which leads to greater productivity and an increase in the company’s bottom line. • An effective compliance program signals to the industry that the company is doing business ethically, making it more competitive. 10

Designing an Effective Compliance Program • U.S. Federal Sentencing Guidelines were established by the U.S. Sentencing Commission. • The guidelines provide guidance on how convicted companies should be sentenced, and detail what an “effective” compliance and ethics program is.

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Designing an Effective Compliance Program • U.S. Sentencing Guidelines stress: 1) Exercise due diligence to prevent and detect criminal conduct. 2) Promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law.

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Designing an Effective Compliance Program • U.S. Sentencing Guidelines provide that, at a minimum, a company must do the following to have an effective compliance and ethics program: 1) Establish standards and procedures to prevent and detect criminal conduct. 2) Ensure that the company’s governing authority understands the content and operation of the program and exercises reasonable oversight. 13

Designing an Effective Compliance Program 3) Keep bad actors out of managerial ranks and other key positions. 4) Take reasonable steps to communicate periodically, and in a practical manner, its standards and procedures to its officers, employees, and agents. 5) Take reasonable steps to ensure that the program is followed, is evaluated for effectiveness, and has a system for employees and agents to seek guidance without fear of retaliation. 14

Designing an Effective Compliance Program 6) Promote and enforce the program through appropriate incentives and disciplinary measures for engaging in criminal conduct. 7) Take reasonable steps to respond appropriately to criminal conduct and prevent further similar criminal conduct.

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Designing an Effective Compliance Program • The majority of a federal contractor’s duties and obligations are outlined in the FAR (codified in Title 48 of the US Code of Federal Regulations). • FAR Part 52.203-13 incorporates language from the U.S. Sentencing Guidelines regarding the promotion of a compliant, ethical, and diligent organization. 16

Designing an Effective Compliance Program • FAR Part 3.10 states that a contractor should implement a written code of ethics. More required if the contractor receives awards: − Valued above $5 million − With a performance period of 120 days or more

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Designing an Effective Compliance Program • Mandatory requirements of FAR Part 52.203-13 further specify that a contractor must, within 30 days after contract award: − Have written a code of business ethics and conduct − Provide a copy of the code to each employee engaged in performance of the contract − Promote compliance with its code of business ethics and conduct 18

Designing an Effective Compliance Program • To comply with the U.S. Sentencing Guidelines and FAR requirements, a contractor should: 1) Assign to a high-level person within the company the overall responsibility for the ethics and compliance program. 2) Assign to other specific persons the day-today operational responsibility for the program. 19

Designing an Effective Compliance Program 3) Devote adequate resources to the program. 4) Make sure that everyone in the company understands that ethics comes from the top and flows to all levels. 5) Have an ethics hotline and thoroughly investigate reports of ethical breaches. 6) Design a program that is tailored to the company’s type of work and operations.

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Designing an Effective Compliance Program 7) Ensure that all personnel, including the company’s agents, are familiar with the program. 8) Use written materials that are relatively simple, straightforward, and user-friendly. 9) Evaluate and promote all personnel on their efforts to implement and comply with the program. 10) Integrate ethics and compliance as a part of the company’s culture. 21

Areas of Potential Violations: Anti-Kickback Act (41 U.S.C. §§ 8701 to 8707) • Prohibits contractors and subcontractors from soliciting, accepting, or attempting to accept any kickbacks – Kickbacks: any money provided by any contractor or employee to a government official for the purpose of improperly obtaining or rewarding favorable treatment in connection with a contract

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Areas of Potential Violations: Anti-Kickback Act • Intended to preserve the competitive procurement process • Requires prompt reporting of kickbacks and cooperation with any investigation • Civil and criminal sanctions apply

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Areas of Potential Violations: Procurement Integrity Act (41 U.S.C. § 423) • Prohibits disclosing and obtaining procurement information, including contractor bid or proposal information or source selection information

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Areas of Potential Violations: Procurement Integrity Act • Implemented by FAR Part 3.104-2, which prohibits access to or distribution of certain information related to a procurement during the source selection process while also governing relationships between procurement officials and contractors

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Areas of Potential Violations: Procurement Integrity Act • Specifically, the Act and FAR prohibit: 1) Disclosing of “contractor bid or proposed information” or “source selection information” by current or former federal employees or by individuals who are advising the government 2) Obtaining “contractor bid or proposal information” or “source selection information” by federal employees and contractor personnel before the award of the contract to which such information relates 26

Areas of Potential Violations: Procurement Integrity Act 3) Contacts for non-federal employment by an officer to an agency official who has had personal and substantial involvement in a procurement or an agency official to an officer 4) Certain former agency official serving as a procuring contracting within one year after such agency official served as a procuring contract officer or source selection authority

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Areas of Potential Violations: Truth in Negotiations Act (10 U.S.C. § 2306(a)) • Requires contractor submission of cost and pricing data to the government; such submissions must be “current, accurate, and complete as of the date of agreement on price” • Establishes the requirements for submission and circumstances under which a contractor must certify the accuracy, completeness, and currency of cost or pricing data 28

Areas of Potential Violations: Truth in Negotiations Act – Purpose • Create parity between government and contractors in negotiating price. • Ensure good faith disclosure by contractors to the government. • Provide fair and reasonable prices • Protect the government when a contractor’s cost is a significant factor in negotiating price. 29

Areas of Potential Violations: Truth in Negotiations Act – Purpose • TINA seeks to put government in the same position as contractors regarding access to contractor cost data so government can perform effective, independent evaluation of the reasonableness of the contractor’s price proposal

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Areas of Potential Violations: Truth in Negotiations Act • Applicability: – Negotiated prime contracts, modifications, and subcontracts where the government required cost or pricing data – Modifications of advertised contracts when the modification exceeds the applicable dollar threshold

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Areas of Potential Violations: Truth in Negotiations Act • Threshold: – The current threshold is $700,000 for prime contracts awarded on or after the effective date of October 1, 2010, and for any subcontracts or modifications under those prime contracts that are expected to exceed $700,000. – Contracting officers can request certified cost or pricing data between the Simplified Acquisition Threshold of $150,000 and the certified cost or pricing data threshold. 32

Areas of Potential Violations: Truth in Negotiations Act • Remedies: – TINA provides the government with a price remedy if a contractor fails to comply and includes provisions for interest and penalties. – The price reduction remedy takes effect when the contractor does not submit accurate, complete, and current data for a contract and the government relied on that defective data in determining the contract price. 33

Areas of Potential Violations: Adequate Disclosure • Goal: disclose all potentially relevant cost or pricing data before and during negotiations • Does not include: – More accurate, complete, and current cost or pricing data that becomes available after the price agreement date or another agreed-upon cutoff date

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Areas of Potential Violations: Adequate Disclosure • As later information comes into your possession, it should be submitted promptly to the Contracting Officer in a manner that clearly shows how the information relates to the offeror’s price proposal.

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Areas of Potential Violations: Adequate Disclosure • Common Mistakes − Failure to disclose cost or pricing data that becomes available after submission of the initial proposal, but before agreement on price − Submitting updated proposals reflecting revised cost estimates throughout the fact-finding/negotiation process without the disclosure of the more current cost or pricing data − Ignoring data from lower tier contractors − Trying to make the numbers 36

Areas of Potential Violations: Mandatory Disclosure • The government has made it clear it is increasing efforts to prevent and detect fraud involving money. • Regulations mandate disclosure by government contractors of “credible evidence” or criminal violations, FCA violations, and significant overpayments, and obligate contractors to adopt enhanced internal control systems. 37

Areas of Potential Violations: False Claims • What makes a claim false? – Factual falsity – Legal falsity – Certification may be “express” or “implied”

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Areas of Potential Violations: False Claims Act – Trends • 2000s saw: • Tremendous growth in FCA litigation • Creation of DOJ and federal agency false claims task forces • In 2010 alone, DOJ collected roughly $3 billion from contractors in civil settlements and judgments in FCA cases.

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Areas of Potential Violations: False Claims Act (18 U.S.C. § 287) • Places liability for willfully submitting a false claim to the government, causing another to submit a false claim to the government, or making a false record or statement to get a false claim paid by the government.

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Areas of Potential Violations: False Claims Act – How Do They Arise? • Most cases arise pursuant to whistleblower or qui tam provisions of statute. – Private people or qui tams bring suit on behalf of the United States. – United States investigates allegations and chooses whether to assume control of the lawsuit.

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Areas of Potential Violations: Civil False Claims Act (31 U.S.C. §§ 3729-3733) • Common violations – Goods or services not provided – Substandard goods or services provided – Inflated costs

• Penalties − Civil penalty of $5,500–$11,000 per claim, plus three times the damages sustained by the government, plus attorney’s fees and the cost of the U.S. and the Relator 42

Areas of Potential Violations: Civil False Claims Act • Imposes liability for: − “Presenting” or causing the presentment of false claims to government or recipient of federal funds − Making, using, or causing false record or statement material to a false claim − Conspiring to submit false claims − Reverse false claims

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Areas of Potential Violations: Civil FCA (31 U.S.C. §§ 3729-3733) • A violation occurs when a contractor knowingly presents, or causes to be presented, to the government, a false or fraudulent claim for payment or approval. • “Knowingly” is defined as: − Has actual knowledge − Acts in deliberate ignorance of the truth − Acts in reckless disregard for the truth 44

Areas of Potential Violations: Reverse False Claims • Response to early cases holding that fraudulently reducing the amount owed to the government was not a false claim • Company can be held liable for: − Making, using, or causing a false record or statement material to an obligation to pay or transmit money or property to the government, or − Concealing or improperly avoiding or decreasing an obligation to pay money 45

Areas of Potential Violations: FCA • Contractor may be liable under TINA, but not the FCA if defective data was result of an “honest mistake”

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Areas of Potential Violations: Export Control • Export control laws govern the export of goods, software, technology, and information. • Export control laws are triggered as a result of physical shipment, electronic transmission, or release of information.

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Areas of Potential Violations: Export Control • Any government contractor who employs foreign nationals, has foreign subsidiaries or foreign parent companies, or has business dealings with foreign companies or foreign nationals must be concerned about export controls.

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Areas of Potential Violations: Export Control • A company can also be held liable for shipping goods to a third party if it knows, or has reason to know, that the third party will ship the goods in violation of export laws. • Example: A company cannot evade export laws by selling a product to a domestic company knowing that the domestic company will ship goods to North Korea. 49

Areas of Potential Violations: Export Control–3 Primary Regulations 1) International Traffic in Arms Regulations (ITAR) (Department of State) – Regulates exports of military articles and information and defense services

2) Export Administration Regulations (EAR) (Department of Commerce) − Regulates exports of commercial and dualuse goods and technology (items that can be used for commercial and military purposes) 50

Areas of Potential Violations: Export Control–3 Primary Regulations 3) U.S. embargoes (Department of Treasury) – Regulates exports to U.S. economic embargoed countries (Cuba, Iran, Sudan, etc.) and prohibitions on dealing with terrorists and drug traffickers

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Areas of Potential Violations: Foreign Corrupt Practices Act (15 U.S.C. § 78dd-1)

• Introduction – Enacted in 1977 in response to revelations of widespread bribery of foreign officials by U.S. companies – SEC reported that: • Companies were using secret “slush funds” to make illegal campaign contributions in the U.S. and corrupt payments to foreign officials. • Companies were falsifying corporate financial records to conceal payments. 52

Areas of Potential Violations: Foreign Corrupt Practices Act “Since 2009, the number of prosecutors we have devoted to working on FCPA cases has approximately doubled ... As a result of our efforts over the past three-and-a-half years, robust FCPA enforcement has become part of the fabric of the Justice Department: Our global anti-corruption mission has seeped into the Criminal Division’s core. And there is no turning back. The FCPA is now a reality that companies know they must live with and adjust to; and this nation is better off for it.” —Lanny Breuer, former Assistant Attorney General, November 16, 2012

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Areas of Potential Violations: Foreign Corrupt Practices Act • Anti-bribery provisions – U.S. Companies and citizens – Foreign subsidiaries – Anyone in the world if they take acts in furtherance of an improper payment while within the United States

• Important to focus on anti-bribery concerns any time a government official is involved in transacting company business 54

Areas of Potential Violations: Foreign Corrupt Practices Act • U.S. companies and citizens cannot: – Directly or indirectly corruptly offer, pay, promise to pay, or authorize a payment of anything of value to a foreign official for the purpose of obtaining or retaining business or securing any improper business advantage

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Areas of Potential Violations: Foreign Corrupt Practices Act • “Anything of value” – Cash, gifts, meals, entertainment, travel, property or investments, favors – DOJ/SEC guidance: critical factor is the payor’s intent to influence, not a threshold monetary value

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Areas of Potential Violations: Foreign Corrupt Practices Act • “Foreign Official” – Any officer or employee of a foreign government and/or its departments, agencies, or instrumentalities – Employees of companies or organizations owned and/or operated by foreign governments – DOJ/SEC guidance: Payments to third parties, such as foreign official’s family members, made to influence may violate the FCPA. 57

Areas of Potential Violations: Foreign Corrupt Practices Act • Penalties for a corporation (Anti-Bribery Provisions) − Up to $2 million criminal fine (or higher under alternative penalty provisions, including twice the amount of gain to the violator or loss to the victim) − Debarment from government contracts − $16,000 civil penalty − Compliance monitor 58

Areas of Potential Violations: Foreign Corrupt Practices Act • Penalties for an individual (Anti-Bribery Provisions) − Prison (up to five years) − Up to $250,000 criminal fine (or higher under alternative penalty provisions, including twice the amount of gain to the violator or loss to the victim) – cannot be indemnified by the company − $16,000 civil penalty 59

Areas of Potential Violations: Foreign Corrupt Practices Act • Internal investigations and disclosures − Enforcement mechanisms are designed to incentivize the disclosure of wrongful conduct to the appropriate government agency. − When discovering potential wrongful conduct, a company must act swiftly to conduct an internal investigation, isolate wrongdoers, adopt remedial measures, implement its compliance program, and decide whether a voluntary disclosure is appropriate. 60

Areas of Potential Violations: Suspension and Debarment • A contractor may face suspension or debarment for the knowing failure by a principal to timely disclose credible evidence in connection with its contracts of a violation of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations • The focus is on present responsibility. 61

What’s Next in Government Contracting? • Debarment and suspension actions will be on the rise. – Reaching new highs – Cracking down on bad actors – Combating waste and abuse to get better value from contractors

• DOJ is steadily becoming more strict with non-compliant government contractors. 62

Conclusion • Government contracting is a complex, yet manageable, process when you have an effective compliance program. • It might seem overwhelming, but the decreased risk of non-compliance and long-term benefits to the company substantially outweigh the costs and inconveniences of implementing a compliant and ethical program. 63

Questions?

Vincent J. Napoleon

D. Grayson Yeargin

Partner

Partner

401 Ninth Street NW, Suite 900 Washington, DC 20004 202-585-8379

401 Ninth Street NW, Suite 900 Washington, DC 20004 202-585-8273

[email protected] www.nixonpeabody.com

[email protected] www.nixonpeabody.com

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