At the request of the Justice Department, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council have proposed a rule that would expand a recently published final rule regarding contractors’ code of ethics and business conduct. Most notably, the proposed rule would require contractors to notify the government of suspected violations of criminal law related to the award or performance of a government contract.
The proposed rule indicates that the department is concerned about a perceived increase in procurement fraud. However, the rule is ill-conceived and overreaching. It is ambiguous about when and what information contractors must disclose and how investigators would protect that information.
The proposal would apply to most agency contracts that have a value of more than $5 million and a performance period of 120 days or more. It would require a contractor to notify the contracting agency whenever it has reasonable grounds to believe that a criminal law has been violated in connection with the award or performance of a contract or subcontract. A knowing or deliberate failure to report such a suspected violation or contract overpayment in a timely manner would be a basis for suspension or debarment.
The proposed rule does not provide sufficient detail regarding what would trigger the disclosure obligation, such as what constitutes reasonable grounds to believe that a violation has occurred. For example, is disclosure required whenever a contractor has a mere suspicion of a violation, or is clear evidence required?
The rule’s ambiguous standard would place contractors in the uneasy position of having to guess at whether disclosure is required and suffering profound consequences if they guess wrong. Moreover, the requirement would force contractors to determine whether the underlying conduct itself constitutes a violation of criminal law. Thus contractors might feel compelled to disclose a legitimate contract interpretation issue or good faith dispute because they are uncertain whether the matter is covered by the proposed rule.
Another troubling aspect of the proposed rule is that it does not define whether a knowing failure to report requires knowledge of a suspected criminal law violation or some lesser threshold. That omission is especially significant because the provision applies to all contractors regardless of the size or type of contract. Moreover, by tying the penalties to the mere failure to report, contractors could be severely punished, even when the underlying facts do not amount to criminal conduct.
The involuntary disclosure standard raises substantial questions about the protection of the attorney/client privilege, which is likely to be implicated in company investigations of suspected violations. It also would place contractors in the difficult position of potentially being forced to disclose information that may be protected by confidentiality agreements between a contractor and its subcontractors or teaming partners.
The proposed rule should be reconsidered pending a thorough examination of the need for an involuntary approach to disclosure. At a minimum, it should be revised to add significant detail regarding the circumstances triggering the disclosure requirement, along with the procedures for handling disclosures, including protections for privileged and other sensitive information.
