The U.S. government has imposed on nearly every
government prime contractor and subcontractor new mandatory disclosure requirements
and specific requirements for Codes of Business Ethics and Conduct. It is critical
for government contractors to understand these profoundly important
requirements.
All contractors, including small business and commercial
item contractors and contractors performing contracts outside the United
States, who are awarded a contract for which the value will exceed $5 million
and the performance will be 120 days or more, are required to have a Code of
Business Ethics and Conduct within 30 days after the contract award, FAR
52.203-13(b).
All contractors awarded a contract exceeding $5 million
value with a 120-day performance period standard noted above, except for small
business and commercial item contractors, are also required to have in place a
business ethics awareness and compliance program, an internal control system, a
periodic review procedure and an internal reporting mechanism within 90 days of
contract award, FAR 52.203-13(c).
While small business and commercial item contractors are
exempt from the latter ethics and compliance program and internal control
requirements, contractors in this category must figure out how they could
demonstrate compliance with the mandatory disclosure requirement, even without
being required to create a formal compliance program and an internal control
system.
These new regulations reflect the need for all contractors to reflect
on how their culture encourages and promotes ethical conduct and whether they are
exercising appropriate due diligence to prevent and detect criminal conduct.
All contractors covered by these new requirements must
ensure that their subcontracts of a value more than $5 million and with a
performance period exceeding 120 days, contain a clause that includes the
substance of clause FAR 52.203-13. FAR 52.203-13(d). This clause will ensure
that the new requirements described above flow down to any subcontractors.
The requirements for contractors to implement a Business
Ethics Awareness and Compliance Program and Internal Controls are based upon
the principles of the U.S. Sentencing Guidelines. The new regulations make
clear that the program must be ongoing and not superficial. Contractors must regularly
communicate their standards and procedures and conduct effective training
programs.
The contractor’s Internal Control System must facilitate
timely discovery of improper conduct in connection with government contracts
and must ensure that corrective measures are promptly carried out. The
contractor must have an internal reporting mechanism, such as a hotline, which
allows anonymity or confidentiality, so employees can report suspected
instances of improper conduct.
While the regulations indicate that contractors
can use a government hotline and informational poster to meet this requirement,
giving such an important element of the program to the government is not an
effective way for a contractor to establish an ongoing program and will not
give the contractor a first line of defense.
Establishing a "Help
Line" that gives employees an opportunity to raise questions, obtain
guidance and make reports without fear of retaliation, is generally recognized
as an effective way to identify and address potential issues.