Government Requires Ethics Code for Contractors

Companion proposal seeks employee disclosure of criminal violations of government contracts

By James Hyatt

New Federal Acquisition Regulations, effective Dec. 24, 2007, require companies receiving government contracts to have a written code of business ethics, to establish an employee business ethics and compliance training program, and an internal control system.

The changes apply to contractors working for the Defense Department, the General Services Administration, and the National Aeronautics and Space Administration, but generally exclude contracts below $5 million. And the rules don't apply to contracts for work done wholly outside the U.S., which some commentators have noted would exclude many contractors in Iraq and Afghanistan.

The proposal didn't appear to pose much controversy; the agencies received only 27 substantive public comments. But the agencies did amend the rule to exclude small business from requirements for a formal training program and internal control system.

A companion proposal appears likely to produce more comment, however. The Justice Department in May 2007 asked the Office of Federal Procurement Policy to require contractors to notify the government "whenever they become aware" of federal criminal violations concerning government contracts or subcontracts.

The companion proposal would make a contractor's record of "integrity and business ethics" relevant in judging its past performance. And contractors could be suspended and debarred for "knowing failure to timely disclose" a violation of Federal criminal law.

The proposal notes that, according to the Justice Department, "few companies have actually responded" to its invitation to report or voluntarily disclose suspected violations. (The proposal would not apply to contracts to acquire commercial items.)

A government analysis estimated that the reporting requirement would apply to about 1,800 prime contractors annually, of which 700 are considered small business, as well as another 700 small business subcontractors.

Writing about the proposal in Ethisphere magazine, Dorn C. McGrath and Sean M. Connolly of law firm Greenberg Traurig called the self-reporting requirements "highly controversial" and noted the proposal "does not address the potential conflicts between its requirements and those of current voluntary disclosure programs." And, they said, the proposal "does not explain how a government contractor would go about policing a mandatory self-reporting requirement with subcontractors."

Commenting on the recently adopted ethics proposal, they said contractors immediately should establish a compliance program. "Write a Code of Conduct. Don't wait until you've been awarded a contract because your code must be in place within 30 days of the award. Trust us, it takes more than 30 days to write a Code and get it approved."

Another suggestion: "Set up internal controls. Determine processes that will ensure timely discovery of improper conduct with government contracts and define the appropriate corrective measures to take. Decide what you will do if you uncover possible fraud with a government contract."

The Ethisphere Institute recently published its first Government Contractor Ethics Ranking, rating the 100 largest government contractors with scores ranging from excellent to below standard and not rated.
"There is a big disparity between the calibers of ethics program within these companies," the Institute said. "And, although the reports of heavy abuse and scandal can be unforgettable, many contractors actually have very effective ethics and compliance programs in place."

Verizon Wireless was ranked first in the survey.