Exclusions from government contracting by suspensions and
debarments, as well as by procurement fraud investigations and
enforcement actions, can scuttle pending corporate transactions.
This BRIEFING PAPER discusses the interactions between (a)
government contractors and their purchasers on the one hand, and
(b) government Suspending and Debarring Officials (SDOs,) SDO
staffs, and the government’s procurement fraud remedies
apparatus on the other, in the context of corporate
transactions.
Understanding the interests of the various public and private
stakeholders is important to breaking down barriers to effective
communication and increasing the chances of closing
transactions.
Common aspects of diligence in the context of government
contracts transactions include understanding which risks may impact
a contractor’s ability to compete for, and win, new government
contracts and what potential liability may exist for past
misconduct. Quantifying those risks can be challenging given the
opacity of much of the government’s procurement fraud and
suspension/debarment operations. This PAPER will identify the more
common categories of interaction as they relate to government
contractor corporate transactions and provide guidelines for
facilitating efficient interactions with SDOs, their staffs, and
the government’s procurement fraud apparatus.
About Suspension And Debarment
Suspensions and debarments are temporary exclusions from new
government contracts, generally lasting up to three
years.1 Causes for exclusion can include, but are not
limited to, commission of certain civil and criminal frauds and
overcharging the government.2 There is also a broad
catch-all provision that permits exclusions in the discretion of
the suspending and debarring official based on “any other
cause of so serious or compelling a nature that it affects the
present responsibility of the contractor or
subcontractor.”3 This catch-all provision is the
most challenging for parties to a pending transaction to deal
with.
About The Government’s Procurement Fraud Remedies
Apparatus
Suspension and debarment is just one element of the
government’s varied and occasionally disjointed procurement
fraud apparatus. The list of stakeholders is long and made up of
myriad different stakeholders such as auditors, contracting
officials, lawyers, investigating agents, suspension and debarment
officials, and the Department of Justice (DOJ). Some agencies,
especially the Military Departments, have additional officials who
coordinate disparate functions and stakeholders.4 Any
one of these stakeholders can create risks for pending
transactions.
The remainder of this PAPER will address common categories of
communication between companies undergoing corporate transactions
and the government’s procurement fraud apparatus and provide
tips and tricks for more effective and efficient interactions.
Compliance Issues Uncovered During Diligence
Pre-transaction diligence frequently uncovers government
contracting compliance issues. While the full range of these issues
varies widely, more common issues can include accuracy of business
size representations, contract noncompliance, quality deficiencies,
and cost and pricing irregularities. Each of these issues has the
potential to result in procurement fraud enforcement action
(including False Claims Act5 actions) as well as
exclusion through suspension and debarment. Regardless of their
type, common steps exist to address compliance issues uncovered
during diligence.
Assuming the compliance issue is material to the pending deal,
the parties will likely want to investigate the source, duration,
and the potential contract noncompliance. At a minimum, the buyer
and the seller will both want to know how big the issue is, how
many contracts are affected, and what contract terms, regulations,
and laws might be impacted. This will permit the parties to conduct
separate analysis of the potential financial and reputational
impacts of the noncompliance and to adjust their strategies
accordingly.
Potential purchasers frequently require contractors to disclose
noncompliance to the government customer prior to closing. By
placing the noncompliance on the government’s radar, the
purchaser may obtain a sense of how serious the issue is in the
eyes of enforcement officials. The government’s response may
impact deal strategy. Additionally, purchasers may also require
sellers to obtain comfort that the issue is over and will not
present additional risks before a transaction closes.
Multiple options exist for communicating government contract
noncompliance to the customer. The most common is through the
Mandatory Disclosure Rule. The Mandatory Disclosure Rule requires
timely disclosure of credible evidence of, among other things,
civil False Claims Act violations, certain violations of criminal
law, and significant overpayments to the cognizant contracting
officer as well as to the relevant Office of Inspector
General.6 Other avenues include conversations or emails
with the purchasing customer, and/or with the contracting
officer.
Regardless of how contractors choose to communicate
noncompliance with the government, both the contracting community
and the procurement fraud community will have interest in the
communication. These communities work at different paces and have
different incentives and goals.
The contracting community’s primary focus is on procuring
the right goods or services, at the right prices, delivered at the
right times. Accordingly, presenting the issues with as little an
impact on cost, schedule, and quality as possible increases the
chance of contracting community non-objection. If the issue does
impact cost, schedule, and/or quality, then a fulsome mitigation
plan with aggressive communication regarding the commitment to
address any and all impacts of the issue is likely to speed
resolution.
The procurement fraud community’s goals are different. The
goals include coordinating the appropriate mix of all applicable
remedies from criminal prosecution to civil fraud recovery to
contractual remedies to potential exclusion from contracting
through suspension or debarment. None of these remedies are
automatic, however. Discretion plays an important role here, too.
While the procurement fraud community is focused on returning
losses to the government and penalizing misconduct, the community
will exercise discretion in the contractor’s favor in certain
circumstances.
For example, rapid and complete remediation can impress the
government’s procurement fraud community. There is no specific
measure of remediation that contractors can use to know when they
have hit the mark. However, the remedial measures and mitigating
factors listed at Federal Acquisition Regulation (FAR) 9.406- 1(a)
are helpful guideposts:
- Whether the contractor had effective standards of conduct and
internal control systems in place at the time of the activity which
constitutes cause for debarment or had adopted such procedures
prior to any Government investigation of the activity cited as a
cause for debarment. - Whether the contractor brought the activity cited as a cause
for debarment to the attention of the appropriate Government agency
in a timely manner. - Whether the contractor has fully investigated the circumstances
surrounding the cause for debarment and, if so, made the result of
the investigation available to the debarring official. - Whether the contractor cooperated fully with Government
agencies during the investigation and any court or administrative
action. - Whether the contractor has paid or has agreed to pay all
criminal, civil, and administrative liability for the improper
activity, including any investigative or administrative costs
incurred by the Government, and has made or agreed to make full
restitution. - Whether the contractor has taken appropriate disciplinary
action against the individuals responsible for the activity which
constitutes cause for debarment. - Whether the contractor has implemented or agreed to implement
remedial measures, including any identified by the Government. - Whether the contractor has instituted or agreed to institute
new or revised review and control procedures and ethics training
programs. - Whether the contractor has had adequate time to eliminate the
circumstances within the contractor’s organization that led to
the cause for debarment. - Whether the contractor’s management recognizes and
understands the seriousness of the misconduct giving rise to the
cause for debarment and has implemented programs to prevent
recurrence.
Contractors will generally be unable to meet each and every one
of the 10 factors listed in FAR 9.406-1(a), but the more they are
able to meet, the better the communication will be received by the
procurement fraud community. The most relevant of the factors are
briefly discussed below:
- Whether the contractor had effective standards of conduct
and internal control systems in place at the time of the activity
or had adopted such procedures prior to any Government
investigation.7 This factor is focused on how well
designed the contractor’s systems were before the misconduct
occurred and therefore focuses the government on whether it is
reasonable to seek to punish the misconduct or whether discretion
is appropriate for a well-meaning mistake that slipped by otherwise
robust controls. - Whether the contractor brought the activity to the
attention of the appropriate Government agency in a timely
manner.8 By communicating promptly about an issue
discovered during diligence, contractors will satisfy this
factor’s requirements. - Whether the contractor has fully investigated the
circumstances and, if so, made the result of the investigation
available.9 There is some tension between the
desire for prompt, though possibly incomplete, disclosure under the
Mandatory Disclosure Rule and the “full investigation”
discussed in this mitigating factor. Nevertheless, keeping the
government apprised of key facts in reasonably prompt fashion
should earn credit under this factor. - Whether the contractor has paid or has agreed to pay all
criminal, civil, and administrative liability for the improper
activity, including any investigative or administrative costs
incurred by the Government, and has made or agreed to make full
restitution.10 The relevant portion of this
remedial measure is whether the contractor has made or agreed to
make full restitution. To the extent the misconduct involves easily
ascertainable amounts of money that are owed to the government,
such as in the time mischarging or price reduction contexts, and if
the company is financially able to do so, the contractor should
consider paying that amount or seeking instructions from the
government to pay that amount to earn credit under this
factor. - Whether the contractor has taken appropriate disciplinary
action against the individuals responsible for the
activity.11 It is generally not sufficient to
disclose facts only. An understanding of root cause and how
remediation addresses the root cause is important. Additionally,
and relevant to this factor, if the facts do not warrant
disciplinary action, the contractor should be prepared to explain
why that is the case. - Whether the contractor has implemented or agreed to
implement remedial measures and whether the contractor has
instituted or agreed to instate new or revised internal control
procedures and ethics training programs.12 Related
to the last factor, a key component of any government disclosure is
to provide an explanation for why the same problem will not
reoccur. That same information is helpful here. The government will
want the contractor to make appropriate changes to address the
misconduct, so the problem cannot reoccur whether or not the deal
closes.
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Footnotes
1. FAR 9.406, 9.407.
2. FAR 9.406-2, 9.407-2.
3. FAR 9.406-2(c), 9.407-2(c).
4. See Department of Defense Instruction 7050.05,
“Coordination of Remedies for Fraud and Corruption Related to
Procurement Activities” (May 12, 2014; incorporating Change 1,
effective July 7, 2020), available at https://www.esd.whs.mil/Portals/54/Documents/DD/issuanc
es/dodi/705005p.pdf?ver=2020-07-07-065758-907.
5. 31 U.S.C.A. §§ 3729–3733.
6. FAR 52.203-13.
7. FAR 9.406-1(a)(1).
8. FAR 9.406-1(a)(2).
9. FAR 9.406-1(a)(3).
10. FAR 9.406-1(a)(5).
11. FAR 9.406-1(a)(6).
12. FAR 9.406-1(a)(7), (8).
Originally published by Thomson Reuters
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