Contractors Should Prepare for New Ethics Rules By Philip M. Dearborn For months now, one of the biggest issues in government contracting has been the proposed rule requiring certain government contractors to have a code of ethics and business conduct. The proposed rule is poised to become final this fall, and contractors that fail to comply with it may face significant penalties. Compliance will vary based on the size of the contractor and the nature of its business, but all affected contractors should be prepared to comply with this rule in the near future. Under the rule, the FAR will be amended to establish mandatory requirements relating to contractor codes of ethics and business conduct. 72 Fed. Reg. 7588 (Feb. 16, 2007). Contractors receiving awards in excess of $5 million that have performance periods of 120 days or more will be required to implement a written code of ethics and business conduct within 30 days after contract award. Additionally, within 90 days after award, the contractor would be required to establish an employee ethics and training program and an internal control system proportionate to the size of the contractor and the extent of its business with the federal government. Finally, the proposed rule would require the contractor to display the fraud hotline poster of the agency’s Office of Inspector General, if the agency has such a poster. For contracts funded with disaster assistance funds, the contractor would be required to display any event-specific fraud hotline poster applicable to the specific contract. The internal control system required by the proposed rule serves two main functions: (1) facilitating timely discovery and disclosure of improper conduct in connection with government contracts; and (2) ensuring that corrective measures are promptly instituted and carried out. To accomplish these goals, a contractor’s internal control system should provide for periodic reviews of company business practices, procedures, policies and internal controls for compliance with the contractor’s code of ethics and business conduct and the special requirements of government contracting. An internal reporting mechanism, such as a hotline, by which employees may report suspected instances of improper conduct should also be included as part of the internal control system. The contractor should follow up on these reports and take disciplinary action for improper conduct. Additionally, the contractor should conduct and cooperate with internal and/or external investigations and audits, as appropriate. Finally, it is important not to sweep any suspected violations of law or other irregularities under the rug. Contractors should timely report these to the appropriate government officials and fully cooperate with any government agencies responsible for investigations or corrective actions. As stated above, the proposed rule requires that contractors establish employee training programs so that employees are properly informed of the company’s ethics policies and procedures. These ethics training programs sensitize employees to the importance of corporate compliance and ethics. Employees should be instructed on how to report suspected instances of improper conduct and they should be encouraged to do so. A workforce that is well trained to identify ethical issues and compliance problems is a company’s best defense against an embarrassing corporate scandal. In addition to complying with the mandatory requirements of the proposed rule, it is important for contractors to recognize the need for knowledgeable leadership as compliance and ethics programs should run from the top to the bottom of a company. The presence of company leadership that is knowledgeable about and engaged in the operation of the company’s compliance and ethics programs is a critical aspect of effective programs. Company leaders should accept primary responsibility for ensuring that effective compliance and ethics programs are in place, and they must exercise reasonable oversight with respect to the implementation and effectiveness of the programs. Finally, ethics and compliance programs should be adjustable. Effective programs will allow a company to react quickly and adjust the programs after unethical conduct has been detected. Once a company becomes aware of its own compliance risks or learns of the challenges that other companies in similar lines of business have confronted, it is important that the company’s leaders take reasonable steps to shore up the company’s compliance program to prevent further similar unethical conduct in the future. It is not clear how agencies will enforce the new rule. It is possible that agencies may require evidence of compliance before award of contracts. Similarly, agencies may consider a contractor’s failure to comply with the ethics rule in future past performance evaluations. Failure to comply may also impact award fees under certain types of contracts. Moreover, if a contractor is required to certify compliance with FAR requirements, it is possible that failure to comply with the ethics requirements could result in a false claim, subjecting a contractor to potential civil and criminal liability. The bottom line is that contractors subject to the rule must be compliant or face the consequences. While the proposed rule is aimed at contractors that receive larger contracts, companies of all sizes should implement corporate compliance and ethics programs. Companies need not wait for the finalization of the rule to begin examining their current operations and to implement or revise their compliance and ethics programs. Having compliance and ethics programs in place, and consistently adhering to them, will help all companies avoid the costly disruption and potential liability caused by an investigation or audit. Philip M. Dearborn is a partner at PilieroMazza PLLC. His practice includes all aspects of government contracts. Contact him at pdearborn@pilieromazza.com.