ETHICS, CONTROLS AND DISCLOSURE:
EXPLORING THE NEW FINAL RULE
Robert J. Sherry
K&L Gates
Dallas, TX / San Francisco, CA
December 3, 2008
OVERVIEW
 Introduction
 Three Major Components of Revised FAR
Coverage
 Code of Ethics/Conduct
 Internal Controls
 Disclosure Obligations
 Other Features of the Final Rule
 Critical Sample Issues
 Conclusion
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INTRODUCTION
 Final Rule: 73 Fed. Reg. 67064 (November 12, 2008)
 Effective Date: December 12, 2008 (but see later comments)
 Genesis:
 2007 DOJ request to OFPP for additional regulation
 “Close the Contractor Fraud Loophole Act” (enacted 2008)
 Principal Impacts:
 Mandatory internal controls for certain
contractors/subcontractors
 Disclosure obligations if “credible evidence” exists of certain
violations of law
 New causes for debarment/suspension relating to failures to
disclose
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REVISED FAR COVERAGE
 Code of Ethics/Conduct
 Now required for commercial item contracts/subcontracts (and
all other contracts/subcontracts containing FAR 52.203-13)
 To be inserted in contracts/subcontracts over $5M, performance
period of 120 or more days
 Effective 30 days after contract award (unless CO agrees to
later date)
 Obligations:




Code of Ethics/Conduct
“Make available” to each performing employee
“Due diligence” to prevent/detect criminal conduct
“Promote compliance” with code
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REVISED FAR COVERAGE

Internal Controls
 Not required for commercial item contracts/subcontracts
 Effective 90 days after contract award (unless CO agrees to later date)
 Previous regulation: internal control “examples”
 Final rule: “Minimum requirements” in 52.203-13
 Ethics awareness/training
 High-level oversight/adequate resources
 “Reasonable” efforts -- “compliant principals”
 Periodic compliance reviews
 Anonymous or confidential “hotline” (or similar mechanism)
 Disciplinary action for improper conduct
 Timely disclosure to IG/CO of specified legal violations
 Disclosure obligation lasts until three years after final payment
 Cooperation with government reviews
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REVISED FAR COVERAGE

Disclosure Obligations
 Applies to all contracts/subcontracts for three years after final payment
 Two sources:
 52.203-13
 Revised debarment/suspension regulations
 What must be disclosed? “Credible evidence” that a principal, employee, agent
or subcontractor has committed
 Certain criminal violations -- fraud, conflicts of interest, bribery, gratuities
 Civil False Claims Act violations
 Also must disclose “significant overpayments” (other than contract financing
overpayments)
 To whom is disclosure made? See FAR 52.203-13:
 Agency IG
 Copy to CO
 If GWAC or similar contract, to “ordering” and “contracting” agency IGs
 Some agency IGs are beginning to develop disclosure protocols
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OTHER FEATURES OF THE FINAL RULE
 FAR modifications
 “Integrity and business ethics” now past performance
information
 Cause for debarment: “knowing failure” by principal to
disclose “credible evidence” of violation
(preponderance standard)
 Cause for suspension: same, but “adequate
evidence” standard
 Modifications of FAR 52.203-13 clause to reflect
changes discussed earlier regarding code, controls,
disclosure
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SAMPLE CRITICAL ISSUES
 Initial thoughts -- more to come/evolve
 Commercial item contract status -- another reason to accept
only commercial item contracts/subcontracts if feasible
 To disclose or not to disclose?
 Balancing investigatory conclusion (no violation) vs. more
aggressive government view
 What is “credible evidence”?
 What “overpayments” must be disclosed?
 E.g., in GSA contract context, must you disclose potential IFF
underpayments/price reduction clause violations?
 What will COs do with information?
 Increase in nonresponsibility determinations?
 Past performance evaluation issues
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CONCLUSION
 Standards in final rule -- subject to evolving
interpretation
 Examine existing code of ethics/conduct
 Examine internal controls
 Examine completed investigations for “open”
contracts
 Other “open” contract issues?
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QUESTIONS?
 Bob Sherry
(214) 939-4945
(415) 249-1032
robert.sherry@klgates.com
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