In the final installment of a four-part webinar series, attorneys from Venable and a consultant from BDO presented CARES Act: It Ain't Money for Nothing – A Government Contractor's Guide to Mandatory Disclosures. The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes provisions relevant to government contractors and their business operations in the wake of the COVID-19 pandemic. During this webinar, the panel discussed some best practices contractors and organizations can undertake to mitigate potential fallout due to disclosures of noncompliance with CARES Act-related funds and beyond. The panel also addressed the requirements of the mandatory disclosure rule, tips for developing and submitting a written disclosure, and how best to disclose potential issues to the government.
What is the Mandatory Disclosure Rule?
The Mandatory Disclosure Rule (the Rule) was published by the Federal Acquisition Regulatory (FAR) Council in 2008 and requires federal contractors to self-disclose credible evidence of certain violations of law and/or significant overpayments in connection with federal contracts. Mandatory disclosures cover criminal violations involving fraud, conflicts of interest, bribery, or gratuities; Civil False Claims Act violations; and significant overpayments. There are some inconsistencies with establishing definitions within the Rule that would solidify reporting requirements, but timely disclosure of actual or perceived violations is still critical to maintaining a contractor’s credibility.
What are companies required to do when making a disclosure?
- Companies should ensure full cooperation with the government by all employees
- A written code of business ethics and conduct is required for covered contracts under the FAR and is recommended for all contractors. This code should be in writing, a uniform method for its distribution to employees should be identified, and it should promote an organizational culture of ethical conduct and compliance
- Companies should have a clear reporting chain for employees and provide periodic training on how to report fraud
The Rule does not require a contractor or its employees to waive attorney-client privilege or work product protection, waive fifth amendment rights, or refrain from conducting internal investigation.
What are recommended compliance program components and controls?
- Periodic internal audits and reviews, and separate reviews following any noncompliance incidents
- Ethics and compliance-specific portals for reporting, including via the web or a telephone hotline
- Protocols to ensure corrective measures are instituted and properly carried out
- Assignment of responsibility for compliance to individuals in higher positions to ensure access to adequate resources
- Implementation of disciplinary actions for misconduct
- Timely disclosure – in writing – to the relevant agency’s Office of Inspector General
While the FAR provides some exemptions, it is advisable that entities comply with these requirements to ensure best practices in government contracting.
What is the False Claims Act and why is it relevant?
Violations of the Civil False Claims Act (FCA) are among the most common reasons for making a mandatory disclosure. The FCA addresses seven situations that can result in a claim by the federal government against a contractor, with the most common being a false or fraudulent request or demand (including within a contract) for money or property presented to an officer, employee, or agent of the U.S. government, or to a contractor, grantee, or other recipient with the money or property to be used on behalf of the federal government. Contractors who “knowingly” participate in this false claim encompass those with actual knowledge or willful ignorance, or those who act with reckless disregard. No proof of specific intent to defraud is required for the government to bring a claim. The government can seek up to three time the amount of wrongful charges (known as “trebled” damages). It also imposes penalties for each fraudulent claim submitted.
What are possible defenses against an FCA claim?
Contractors facing an FCA claim can demonstrate:
- Government knowledge of underlying facts. Well-documented communications with the government client will be beneficial in preparing for this defense. It may be especially relevant for CARES Act-related FCA claims as guidance on that is currently evolving
- Reasonable interpretation of contract terms. There is some dispute in the courts over the validity of this defense, specifically that ambiguity on an issue does not equate to winning a reasonable interpretation defense. To support an ambiguity argument, contractors should document their rationale for all decisions made and should be able to provide contemporaneous back-up material
- Reliance on expert counsel. Good faith reliance on counsel and demonstrated ability to conduct due diligence will contribute to this defense. In today’s climate, documenting all decisions about the Paycheck Protection Program (PPP) is important
Furthermore, the Department of Justice (DOJ) manual does give companies cooperation credit for voluntarily disclosing false claims, cooperating with investigations, and taking remedial measures. The government will consider:
- Timeliness of reporting and voluntary action
- Contractors that ensure facts are correct when making disclosures to maintain credibility
- Truthfulness, completeness, and reliability of any information provided
Notably, successful performance on a contract does not constitute a defense in itself.
If a contractor needs to submit a mandatory disclosure, what should it include?
Contractors should always stick to the facts and provide good documentation, which is critical to establishing a strong narrative. The disclosure should also include:
- Relevant introductory information about your company and background of business
- Affected contracts and subcontracts to establish scope of investigation
- A list of contracting officers
- A tight chronology of events
- Description of compliance programs and training
- Description of corrective actions to prevent future issues
- Required restitution
- Strong conclusion – outline how compliance programs have worked and will be stronger moving forward
Overall, contractors should discuss their company’s culture of compliance, identify any gaps in existing compliance programs and fix them quickly, and give careful consideration to the agency being dealt with in order to tailor responses appropriately.
What are some common problems resulting in the requirement of a mandatory disclosure submission?
- Incorrect recording/charging of time
- Employee qualification issues
- Product substitutions
- Incorrect certifications – either required or implied
- Labor mischarging between categories and contracts
- False testing
- Failure to use appropriate funds
- Using foreign-made products where domestic product is required
What are key takeaways for contractors that aim to avoid mandatory disclosures?
- Basic ethics is important – promote a culture of compliance
- Be able to produce records of employee training
- Have a single point of contact with your relevant government agency for the mandatory disclosure and funnel communications through that person
- Exit interviews/debriefs with departing employees can provide insight, as can certifications from departing employees that those employees were not aware of fraud committed during the time of their employment
- Provide employee training on any required certifications
- Know your company’s compliance policies and ensure employees are familiar with them – not all policies are created equal and are subject to different rules