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The Government
Contractor
®
Information and Analysis on Legal Aspects of Procurement
Vol. 57, No. 6
February 11, 2015
Focus
¶ 39
FEATURE COMMENT: Look What We Got
For The New Year—Implementation Of
The ‘Super Circular’ And Its Mandatory
Disclosure Obligations
Introduction—The end of 2014 brought big news
in the form of new obligations for entities (such as
federal research and development (R&D) contractors) that enter into financial assistance agreements
with the Federal Government. Compliance with
the regulations enacting the Office of Management
and Budget’s “Uniform Administrative Requirements, Cost Principles, and Audit Requirements
for Federal Awards,” commonly referred to as the
“Super Circular,” became compulsory as of Dec. 26,
2014. The primary objectives of the regulations are
streamlining and improving financial assistance
agreement performance and integrity by providing
a Government-wide framework for the solicitation,
award and management of such agreements. See 78
Fed. Reg. 78590, § I.A. (Dec. 26, 2013).
The Super Circular is promulgated at 2 CFR
pt. 200 and, as its title indicates, establishes uniform administrative requirements, cost principles
and audit requirements for non-federal recipients
of financial assistance agreements, which include
grants and cooperative agreements. The final guidance is in fact “super” because it consolidates and
expressly supersedes eight previously separate
OMB circulars:
• Circular A-21 (Cost Principles for Educational Institutions);
• Circular A-87 (Cost Principles for State, Local
and Indian Tribal Governments);
• Circular A-110 (Uniform Administrative
Requirements for Grants and Other Agree4-167-095-5
ments with Institutions of Higher Education,
Hospitals and Other Non-Profit Organizations);
• Circular A-122 (Cost Principles for Non-Profit
Organizations);
• Circular A-89 (Catalog of Federal Domestic
Assistance);
• Circular A-102 (Grants and Cooperative
Agreements With State and Local Governments);
• Circular A-133 (Audits of States, Local Governments and Non-Profit Organizations);
and
• the guidance in Circular A-50 on Single Audit
Act follow-up.
Prior to the Super Circular, recipients and subrecipients of grants and cooperative agreements
had to sort through different sets of regulations
and guidance, often applying different requirements, depending upon the awarding agency, among
other things. Now, with limited exceptions, the consolidated guidance provided by the Super Circular
provides a single set of regulations to guide the
award and management of all financial assistance
agreements to non-federal entities.
“Non-federal entity” is defined in the regulation
as “a state, local government, Indian tribe, institution
of higher education, or nonprofit organization that
carries out a Federal award as a recipient or subrecipient.” 2 CFR § 200.69. “Non-federal entity” does
not include for-profit entities, but federal agencies
may apply the regulations to for-profit entities. See 2
CFR § 200.101(c). The advantages gained in streamlining the regulations and circulars, however, come
with a learning curve and some important new rules.
Summary of the Super Circular—The Super
Circular is divided into six parts:
• Subpart A—Acronyms and Definitions;
• Subpart B—General Provisions;
• Subpart C—Pre-Federal Award Requirements and Contents of Federal Awards;
• Subpart D—Post Federal Award Requirements;
© 2015 Thomson Reuters
¶ 39
• Subpart E—Cost Principles; and
• Subpart F—Audit Requirements.
The Super Circular also includes 11 appendices of
varying importance depending on the type of organization receiving federal assistance. For example, Appendix III—Indirect (F&A) Costs Identification and
Assignment, and Rate Determination for Institutions
of Higher Education (IHEs), applies to institutions of
higher education, and Appendix IX—Hospital Cost
Principles, applies to hospitals.
The Super Circular applies to federal agencies
that award federal funds and to non-federal organizations that receive federal funds through financial
assistance agreements. These agreements include
grants, cooperative agreements and other agreements
for federal assistance, such as loan agreements. A
non-federal entity receiving federal funds may be a
direct recipient of those funds, a subrecipient receiving federal funds through a subaward, or a contractor.
See 2 CFR §§ 200.22–.23, .86, .92, .93 and .101(b)(1).
Recipients and subrecipients may act as passthrough entities and make subawards. They may
also award “contracts” for the purchase of property
or services needed to carry out the project funded
by the financial assistance agreement. See 2 CFR
§§ 200.22–.23. Determinations regarding whether
an award by a recipient or subrecipient is a subaward or a contract are controlled by 2 CFR
§ 200.330.
Different compliance obligations apply to organizations depending on their status as a recipient,
subrecipient or contractor (previously referred to as
a “vendor” in OMB Circular A-133). Recipients and
subrecipients must comply with the Super Circular
requirements unless the Super Circular or terms and
conditions of the award indicate otherwise. Contractors
to recipients and subrecipients need only comply with
the compliance obligations set forth in Appendix II to
pt. 200. See 2 CFR § 200.101(b)(1).
With the Super Circular now in effect, recipients
and subrecipients should become very familiar with
the new compliance obligations. All of the obligations
in the Super Circular require attention, but of important note are the new disclosure requirements.
New Disclosure Obligations—Non-federal
entities are now required to disclose in writing to the
federal awarding agency or pass-through entity any
potential conflict of interest, in accordance with the
applicable agency policy. See 2 CFR § 200.112. Failure
to comply with the new disclosure requirement could
2
The Government Contractor®
result in, among other things, termination of the
award or other remedies for noncompliance listed in 2
CFR § 200.338. Previously, under Circular A-110, nonfederal entities were required to maintain a code of
conduct addressing conflicts of interest, but they were
not required to disclose affirmatively the presence of
conflicts of interest prior to receiving federal funds.
Additionally, and potentially more importantly,
non-federal entities that receive or apply for a grant
or cooperative agreement (but not other types of
assistance agreements) now have a mandatory disclosure requirement. See 2 CFR § 200.113; 2 CFR
§ 200.101(b)(1). This rule is similar in some respects
to the Federal Acquisition Regulation’s mandatory
disclosure rule (MDR), but it contains key differences. See FAR 52.203-13; see also FAR 9.406-2(b)
and 9.407-2(a). As explained below, this disclosure
requirement carries with it potentially severe consequences for failing to comply, and warrants further
explanation and consideration.
The Super Circular’s MDR—General: The
new mandatory disclosure requirement at 2 CFR
§ 200.113 (assistance agreement rule) states,
The non-Federal entity or applicant for a Federal award must disclose, in a timely manner,
in writing to the Federal awarding agency or
pass-through entity all violations of Federal
criminal law involving fraud, bribery, or gratuity violations potentially affecting the Federal
award. Failure to make required disclosures can
result in any of the remedies described in 200.338
Remedies for noncompliance, including suspension or debarment. (See also 2 CFR Part 180 and
31 U.S.C. 3321).
Failure to comply with this disclosure requirement can result in, among other things, the imposition of additional conditions on the recipient or
subrecipient, the temporary withholding of cash
payments pending correction, disallowance of costs of
the activity or action not in compliance (this arguably
could be the entire award for a non-disclosure), whole
or partial suspension or termination of the award,
suspension or debarment, withholding of further program awards, or “other remedies that may be legally
available.” See 2 CFR § 200.338.
To avoid these potentially significant penalties
and preserve their ability to receive grants and cooperative agreements, recipients, subrecipients and
applicants must quickly learn how to comply with the
requirement to disclose violations of certain criminal
© 2015 Thomson Reuters
Vol. 57, No. 6 / February 11, 2015
laws “potentially affecting the Federal award.” Unfortunately, the assistance agreement rule leaves some
significant issues for interpretation without meaningful guidance. For example:
• What constitutes a “timely manner”?
• Does a subrecipient have the option of reporting to either the awarding agency or the passthrough entity?
• Does reporting a “violation” require making
a report before a conviction, if the recipient
or subrecipient believes a violation occurred?
If so, can a disclosure be used as evidence of
guilt?
• What specific laws are included in “Federal
criminal law involving fraud, bribery, or gratuity violations potentially affecting the Federal
award”?
• What does “potentially affecting the Federal
award” mean?
The mandatory disclosure provisions in the Super
Circular obviously mirror certain aspects of the MDR,
though there are some significant differences. Nonetheless, the MDR can provide some limited guidance
for compliance.
Comparison to the FAR Rule: Government
contractors that receive FAR-based procurement
contracts are (or should be) very familiar with the
MDR obligations. The MDR has been in place since
2008 and has significantly affected the compliance
practices of contractors and the Government. Indeed,
mandatory disclosures now are a standard practice
among most large, sophisticated Government contractors. Because the Government spends more on grants
and cooperative agreements than on procurement
contracts each year, it was only a matter of time before similar requirements and practices were imposed
on recipients of such Government funds.
In contrast to the assistance agreement rule,
the MDR requires that all Government contractors
and subcontractors timely disclose, in writing, to the
agency inspector general, with a copy to the contracting officer, whenever, in connection with the award,
performance or closeout of a contract or subcontract,
the contractor has credible evidence of:
• a violation of criminal law (title 18, U.S. Code)
involving “fraud,” “conflict of interest,” “bribery” or “gratuities”;
• a violation of the civil False Claims Act (FCA); or
• a “significant” overpayment on a contract.
FAR 3.1003 and 52.203-13.
© 2015 Thomson Reuters
¶ 39
The failure to timely disclose “credible evidence”
of a violation is a possible basis under the MDR for
suspension and debarment by the federal executive
agencies for a period of up to three years. See FAR
3.1003, 9.406-2 and 9.407-2.
From comparing the assistance agreement rule
and the MDR, it would be reasonable to conclude that
reporting in a timely manner should be interpreted
consistently between the two. Thus, recipients and
subrecipients (when used below in connection with
the assistance agreement rule, recipients and subrecipients include applicants) should have a reasonable
amount of time to investigate and determine whether
a violation has occurred. Further, it would be reasonable to conclude that a subrecipient has the option of
reporting directly to the awarding agency.
Comparison with the MDR, however, does not
shed any light on how to interpret when a reportable
“violation” has occurred. The MDR provides some
hints with its “credible evidence” standard. Clearly,
the intent of the MDR is for contractors to bring
credible evidence of potential violations, of which
the Government is not aware, to the attention of
the Government. It would follow that the assistance
agreement rule would have the same goal—i.e.,
reporting of violations not otherwise known to the
Government.
However, by not including a “credible evidence”
or similar qualifier, OMB leaves recipients and subrecipients with a difficult judgment call regarding
whether there is an actual violation—not just credible evidence of a violation. Unless and until OMB
amends the language of the regulation, best practices
for recipients and subrecipients in most cases likely
will be to use the FAR “credible evidence” standard
when deciding whether to report, and then report
the “violation” without admitting that a violation has
occurred. However, the analysis necessary for such
a decision should be made on a case-by-case basis
and is far beyond the scope of this Feature Comment.
Recipients and subrecipients should consult legal
counsel as soon as possible regarding compliance
with this assistance agreement rule in the event of a
potentially reportable violation.
Finally, comparison with the MDR informs interpretation of the violations that are covered by the
assistance agreement rule (i.e., “Federal criminal
law involving fraud, bribery, or gratuity violations
potentially affecting the Federal award”), but only to
a limited extent. Unfortunately, the assistance agree3
¶ 39
ment rule arguably covers more criminal violations
than does the MDR, which is limited to title 18, U.S.
Code. See FAR 52.203-13. At the very least, the assistance agreement rule covers the same laws found
in title 18, U.S. Code that are covered by the MDR.
Title 18, for example, includes numerous criminal
statutes that could be construed as involving “fraud.”
Some activities that may involve fraud under title 18
for the purposes of the MDR are
• payment requests for work not performed or
materials not purchased/provided;
• cost or labor mischarging;
• defective pricing;
• defective parts or product substitution;
• kickbacks;
• noncompliance with the Trade Agreements Act
or Buy American Act;
• misrepresentations regarding company size
status; and
• misrepresentations regarding compliance with
socioeconomic requirements.
In addition to reporting the above activities that
could result in a violation of “fraud”-related statutes,
contractors, recipients and subrecipients also must
report violations of bribery and gratuity statutes,
e.g., 18 USCA § 201—Bribery of public officials and
witnesses.
As noted above, the assistance agreement rule is
not limited to title 18, U.S. Code, like the MDR, so recipients and subrecipients need to be more expansive
and vigilant in their review for potentially reportable
criminal violations. Interestingly, however, unlike the
MDR, the assistance agreement rule does not require
reporting of violations of the FCA or significant overpayments.
4
The Government Contractor®
Conclusions—The new assistance agreement
rule and conflict of interest disclosure requirement
are important compliance obligations that should not
be overlooked. Failure to comply with their requirements could result in, among other things, being
debarred from receiving future grants or cooperative
agreements. Disclosure, of course, comes with its own
risks if not done properly.
Recipients and subrecipients should update and
bolster their policies (including their code of ethics) and
procedures to ensure disclosure consistent with the assistance agreement rule. To ensure effectiveness, such
policies and procedures must set forth clear rules that
are made available to all employees potentially affected by the award. They should also require the exercise
of due diligence to prevent and detect criminal conduct,
promote a culture of ethical conduct and compliance
with legal requirements, and require timely disclosure
of potential violations of law. Of course, recipients and
subrecipients also should have a standard procedure
in place for disclosing violations, when appropriate.
This should include consultation with or assistance
from legal counsel experienced in ethics/compliance
and mandatory disclosure matters.
F
This F eature C omment was written for T he
Government Contractor by Paul W. Bowen and
Mitchell E. Parrish, attorneys at K&L Gates,
LLP. Mr. Bowen is a partner in the firm’s Government Contracts and Procurement Policy practice
group. Mr. Parrish is an associate in the firm’s
Higher Education Institutions, Health Care and
FDA practice groups. They can be contacted at
paul.bowen@klgates.com and mitchell.parrish@
klgates.com.
© 2015 Thomson Reuters