Mandatory Disclosures for Federal Government …...2018/09/25  · fraud, bribery, or gratuity violations potentially affecting the federal award” DFARS rule promoting “voluntary

MandatoryDisclosuresforFederalGovernmentContractors:What,How,andWhen?

KaraM.SacilottoKevinB.Muhlendorf

September25,2018

Thispresentationisaccompaniedbyoralexplanationandshouldnotberelieduponforlegaladvice.Copyright©2018WileyReinLLP

Overview§  StatisticsofInterest§  DisclosureObligations§ WhistleblowerWorld§  DOJPolicyChanges§  TipstoMitigateRisks

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Statistics§  DODIG•  Over5,700contactstotheDODHotlinefromOct.1,2017-Mar.31,2018

–  Mostrelatedtopersonnelmisconduct,personnel-relatedmatters,reprisalcomplaints,andimproperprocurementorcontractadministrationmatters

•  940whistleblowerreprisalcomplaintstoDODIGorComponentIG–  84concerneddefensecontractorreprisal

•  113contractordisclosures,asrequiredbyFAR52.203-13–  Largestpercentageofdisclosuresrelatedtolabormischarging(68%)–  Fewerthanhalfthereportsthanfromoneyearago(274inOct.2016-Mar.31,2017)

§  GSAIG•  5contractordisclosuresreceivedOct.1,2017-Mar.31,2018

–  Alsolessthanyearago(7forperiodOct.2016-Mar.31,2017)

•  Concludedevaluationof8disclosures,recoveringover$1.4million(M)

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Statistics§  Dec.21,2017:DepartmentofJustice(DOJ)reportsFalseClaimsActrecoveriesforFiscalYear(FY)2017•  $3.7billion(B)(onebillionlessthanFY2016)

–  $2.4Bfromhealthcareindustry,includingdrugcompanies,medicaldevicecompanies,hospitals,nursinghomes,labs,andphysicians

–  $543Mfromfinancialindustryrehousingandmortgagefraud–  Procurementfraudrecoveriesranthegamut:

§  $95M(plusforegoing$249Minclaims)toresolveallegationsofoverchargingforlocalproduceprovidedtosoldiersinIraq/Kuwait

§  $125MtoresolveallegationsthatchargedDOEfordeficientnuclearqualitymaterials§  $45MtoresolveallegationsthatmadefalsestatementsandclaimstoGSAinnegotiationofsoftwarelicenses

§  $29.5MtoresolveARRAoverchargingallegations§  $16Mtoresolveallegationsinvolvingsmallbusinessprogrameligibility

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Statistics§  DOJ(cont’d)•  Whistleblowersfiled669quitamsuitsinFY2017–“anaverageofmorethan12new

caseseveryweek”–  Ofthe$3.7Brecovered,$3.4Brelatedtoquitamsuits

§  EventhoughFCArecoveriesoveralldeclined,quitamsuitrecoveriesincreased($3.4BinFY2017vs.$2.9BinFY2016)–  DOJpaidout$392Mtowhistleblowers

§  ISDC•  Agencysuspensionsanddebarmentsdecreased14%inFY2017overFY2016(604

suspensions,1613proposeddebarments,and1423debarmentsinFY2017)–  EvendecreasednumbersrepresentnearlydoubletheactivityreportedinFY2009,whentheISDC

begantrackingthisdata•  Proactiveoutreachesbycontractorsbeforeadebarringofficialraisesconcernsalso

decreasedfrom76to53betweenFY2016andFY2017•  Pre-noticeletters(e.g.,showcause)increased21%

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FARMandatoryDisclosure§  FAR52.203-13,ContractorCodeofBusinessEthicsandConduct–  Businessethicsawarenessandcomplianceprogram,generallytracks

FederalSentencingGuidelinesrequirementsforeffectivecomplianceandethicsprogram

–  Internalcontrolsystemthatallowsthecompanytotimelydiscoverimproperconduct

•  MandatoryDisclosureRequirementsinFAR52.203-13:–  Must“timely”disclose“credibleevidence”ofcertainprocurement-

relatedfederalcriminalviolationsandviolationsofcivilFalseClaimsActtoAgencyOfficeofInspectorGeneral(OIG)

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FARMandatoryDisclosure§  MandatoryDisclosureRequirementsinFAR52.203-13(cont’d):•  Appliestoallcoveredcontracts(>$5.5Mand120days),andmustbefloweddowntocoveredsubcontractors–  Althoughsmallbusinessesandcommercialitemcontractsexemptfrom

52.203-13(c)complianceprogramandinternalcontrolsrequirements,notexemptfrommandatorydisclosureobligations.SeeFAR52.203-13(b)

•  Noncompliancewithdisclosureobligationisgroundforsuspension/debarmentunderFAR9.4(knowingfailureof“principal”to“timely”disclose“credibleevidence”ofenumeratedprocurement-relatedandsignificantoverpayments)

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HowDoYouKnowWhatToDisclose?§  GuidingPrinciples:•  Policyandpracticemustencouragereporting.Ifyouseesomething,saysomething•  Thegoalistobeproactive,notreactive•  HowwouldyouexplaintoaneutralthirdpartyadecisionNOTtodisclose?•  Badnewsdoesnotgetbetterwithage•  The“cover-up”isworsethanthecrime

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FARMandatoryDisclosure:ManagingtheInvestigation§  Overviewofstructureofcorporate/internalinvestigationsatBAESystems•  Chainofcommand

§  Initiationofinvestigation:theintakeprocess§  Whoinvestigates?§  Howareinvestigationstracked?•  “Timely”notdefinedinruleorpreamble(73Fed.Reg.67064(Nov.12,2008))•  Rulecontemplatessufficienttimetoconductinvestigationtodeterminewhether

“credibleevidence”exists•  “Reasonablestepsthatthecontractorconsiderssufficienttodeterminethatthe

evidenceiscredible”

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FARMandatoryDisclosure:ManagingtheInvestigation§  Useoftemplates,scripts§  Howtohandleemployeeswhoarereluctanttotalktointernal/externalinvestigatorsorwhomightbeinvolvedinwrongdoing?

§  Howareinvestigationsfindingsandresultsdocumented?§  Whentohireoutsidecounsel§  Whentohireotheroutsideprofessionals(computerforensics,accountants)

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FARMandatoryDisclosure:ManagingtheDisclosure§  Whatistheprocessfordeterminingwhetheradisclosureisrequired?•  Internalcoordinationofdecision-making•  Obligationrestswiththe“principals”ofthecompany.Whatisa“principal”?Netis

castbothbroadlyandambiguously–  “Officer,director,owner,partner,orapersonhavingprimarymanagementorsupervisory

responsibilitieswithinabusinessentity(e.g.,generalmanager;plantmanager;headofadivisionorbusinesssegment;andsimilarpositions)

§  Draftingthedisclosure•  Useandviewson“batch”disclosures•  Standardletterformat?•  Remedialmeasuresindisclosures?•  Disciplinediscussedindisclosures?

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FARMandatoryDisclosureInsights§  DisclosurestoDODIGaresenttoDOJandAgencySDOasmatterofcourse•  DCISandDCAAmayalsobecomeinvolved•  DODIGpracticetopromptlysendletterthattheirofficeis“coordinatingwiththeDepartmentofJusticeandDefenseagencieswithequitiesorinterestinthedisclosure”•  Routinetoroutedisclosurestocivil/criminalDOJ•  DoesnotnecessarilymeanaDOJjudgmenthasbeenmade

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FARMandatoryDisclosureInsights§  AllmandatorydisclosuresarereviewedintheCriminalDivisionbytheFraudSectioninWashington

§  Veryfewdisclosuresresultincasesbeingopenedbycriminalprosecutors.ManymoreareactedonbyDOJCivil

§  Vastmajorityofdisclosuresaretimechargingviolations,manyveryminor.Vastmajorityofthemindicatedisciplinehadbeenhandedout

§  CasesthatarefurthercriminallyinvestigatedarebroughttoDOJattentionbyOIGorpickedupfromaquitam,notonbasisofmandatorydisclosures

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FARMandatoryDisclosureInsights§  Characteristicsofacriminalcase:•  Loss(greaterflexibilitywhenconductthreatensagovernmentmission)•  Pervasivenessofmisconduct•  Clarityofcontractualorregulatory“groundrules”•  Presenceorabsenceofcertifications•  Internalcommunications(emails,recordedcalls,etc.)•  Evidenceofconcealment

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FARMandatoryDisclosureInsights§  DODIGrequiresinformationonindividualsinvolvedindisclosedconduct•  OftenleadstoinquiryfromSDOregardingpresentresponsibilityofindividuals

•  Mayaffectsecurityclearance

§  Disciplineistwo-edgedsword•  Disciplineexpectedbysomeregulators;othersmaynotthinkitisenough(i.e.,scapegoatorlargerorganizationalissue?)

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FARMandatoryDisclosureInsights§  Remedialmeasures?•  Ifyoumakeadisclosure,behoovesyoutoaddressconsideration/remediation–  Preventretentionofanoverpayment–  Addressthematter“timely”–  GetaheadoftheSDO

§  CloseOutNotice?:DODIGandGSAIGstatethattheygenerallyprovidewrittennoticetocontractorifagencydecidestocloseadisclosure

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FARMandatoryDisclosureInsights§  Regulatorposition:nodeminimisamount•  Someregulatorsbemoanthequantityofdisclosuresvs.qualityofdisclosures

•  Someregulatorsquestionwhether“all”misconductreported§  Yourideaof“credibleevidence”maynotbethesameastheregulator’sview•  Overlylegalisticanalysis?•  Howwillyouexplainthefailure/absenceofadisclosuretoaregulator?

§  Subcontractordisclosures•  UpstreamFCAimplicationsforprime•  Advancenoticetothesubcontractor?

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OtherSourcesofDisclosureObligations§  Grants,2C.F.R.200.113•  Requiresorganizationtodisclose“inatimelymanner”totheawardingagencyorpass-throughentity“allviolationsoffederalcriminallawinvolvingfraud,bribery,orgratuityviolationspotentiallyaffectingthefederalaward”

§  DFARSrulepromoting“voluntarypost-awarddisclosureofdefectivepricing,”finalizedMay4,2018,DFARS215.407-1(c)(i)•  Relatestofindingsofdefectivepricingwhencontractorprovidedcertifiedcostorpricingdata

•  Topromotevoluntarycontractordisclosuresofdefectivepricing,givesDODcontractingofficersdiscretiontodiscussdisclosurewithDCAAand,asnecessary,requestalimited-scopeorfull-scopeaudit

•  DisclosuretoCO18

OtherSourcesofDisclosureObligations§  Overpayments,FAR52.232-25(d)•  IfContractorbecomesawareofaduplicatecontractfinancing/invoicepaymentorthatGovernmenthasotherwiseoverpaid,Contractormustremitoverpaymentwithadescriptionofthecircumstancesoftheoverpayment,affectedcontract/deliverorderandlineitemsalongwithsupportingdocuments

•  DisclosuretoCO§  RepsandCertsinSAMandFAPIIS,e.g.,FAR52.209-5and52.209-7(ResponsibilityMatters)

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OtherSourcesofDisclosureObligations§  Anti-KickbackAct,41U.S.C.§§8701-8707,implementedinFAR3.502,

SubcontractorKickbacks,andFAR52.203-7•  Disclosureobligationssimilar,butnotidentical,tomandatorydisclosure.See41

U.S.C.§8703;FAR3.502-2(g)andFAR52.203-7(c)(2)–  “reasonablegroundstobelieve”standard

•  Criminal,civil,andadministrativepenalties§  CombatingTraffickinginPersons,FARSubpart22.17andFAR52.222-50•  FAR52.222-50(d)requirescontractorto:(1)“notify”COandAgencyOIGofany

credibleinformationthatacontractoremployee,subcontractoremployeeoragenthasengagedinconductthatviolates52.222-50(b)(policyandlistofprohibitedconduct);and(2)anyactionstakenagainstacontractoremployee,subcontractoremployeeoragentpursuanttoclause

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OtherSourcesofDisclosureObligations§  SECDisclosureObligations•  Doyouhavetodiscloseallegationoffraud,aCID,oranSECsubpoena?

–  Itdepends,butgenerallynoautomaticdutytodisclose§  Richmanv.GoldmanSachsGroup,Inc.,868F.Supp.2d261(S.D.N.Y.2012)(nodutytodisclosereceiptofSECWellsnotice)

•  HavetodiscloseifthereisaRule,suchas“material”legalproceedingsinSECRegulationS-K,Rule103

•  Havetodiscloseiffailingtodosowouldrenderanotherdisclosuremisleading

•  Investigationcouldrevealinternalcontrolfailingsrequiringdisclosure

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DisclosuresinaWhistleblowerWorld§  SECWhistleblowerProgram•  Over4,400whistleblowertipsinFY2017

–  NumberoftipshasincreasedeveryyearsinceFY2011–  50%morethanfirstyearwithfullprogramdata(FY2012)

•  InFY2017,CorporateDisclosuresandFinancialsaccountedforhighestpercentage(19%)ofcomplainttype;OfferingFraudwassecondmostcommoncomplaint(18%);Manipulationwasthird(12%)

•  InFY2017,SECawarded$50Mto12individualwhistleblowers–  ThreeofthetenlargestawardswereinFY2017–  $322Mawardedto58whistleblowerssinceprograminception

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DOJCorporateEnforcementPolicy§  Corporatecriminalliabilityisresolvedthrougheitherindictment,guiltyplea,

deferredprosecutionagreement,non-prosecutionagreement,ordeclination§  Outcomedependson“FilipFactors”listedinUSAM9-28.300

•  Natureandseriousnessofoffense•  Pervasivenessofwrongdoingand

managerialinvolvement•  Historyofmisconduct•  Cooperation•  Existenceofeffectivecompliance

program•  Timelyandvoluntarydisclosure

•  Remedialactions•  Collateralconsequencestopublicand

shareholders•  Adequacyofotherremedies,suchas

civilenforcementordebarment•  Adequacyofprosecutionofindividuals

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FactorFour:Cooperation§  Cooperationisconnectedtotheadequacyofcriminalprosecution(“Yates

Memo”)§  Cooperationgenerallyinvolves:•  Revealingresultsofinternalinvestigation(withoutwaiverofprivilege)•  Reviewanddisclosureofemails;documents;andaudiofiles(litigationholdsare

essential)•  Makingcurrentemployeesavailableforinterview•  CoordinationofinterviewswithDOJ(tip:adverseemploymentactionsandpublic

filingsmayimpactinvestigation)•  Assessmentofloss•  Cooperationincourtprocesses

§  ContinuedcooperationthroughDPAorNPAagreements

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FactorsFiveandSeven:CompliancePolicies§  FraudSectionGuidanceon“EvaluationofCorporateCompliancePrograms”(availableonline)issued

inFebruary2017§  Includes11keycompliancemetricsandasetof“commonquestions”thatDOJconsidersin

assessingcomplianceprograms;DOJprosecutorsandconsultantswilltestthese11factors:•  AnalysisandRemediationofUnderlyingMisconduct

(“howdidthisslipthrough?”)•  InvolvementofSeniorandMiddleManagementin

thecomplianceprogram.•  AutonomyandResourcesofcomplianceprogram

(independenceandresources)•  Policiesandprocedures(includingidentificationof

whoatthecompanywasresponsibleforintegratingpoliciesintothecomplianceprogram)

•  Riskassessment(e.g.,identifyingproblemareasbygeographyorindustry)

•  TrainingandCommunication•  ConfidentialReportingandInvestigation(avenues

toreportmisconduct)•  Incentivesanddisciplinarymeasures(bonuses,

promotions,termination)•  Periodictestingandreview•  Thirdpartymanagement(watchingthesubs)•  MergersandAcquisitions

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HowDoYouManage/MitigateTheRisks?§  Carefulpreparationofdisclosuresgivenwideaudience•  Justthefacts–  Factsarenotprivileged

§  Avoidadmissionsandwaiverofprivilege–  Truthfulness–  Completeness–  Remedial/correctiveactions

•  DucksinarowBEFOREdisclosure–  Balance“timely”withsufficientunderstandingoffacts–  Considerpreliminarydisclosureforcomplex/lengthyinvestigations

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HowDoYouManage/MitigateTheRisks?§  Understandandanticipatethatemployeesidentifiedindisclosuremayfindthemselvescontactedbyregulators•  Effectiveinternalinvestigationbeforedisclosure•  Bepreparedfor“target”toclaimstatusas“whistleblower”andhaveinplaceanti-retaliationpolicies

•  Isthemisconductofasingleemployeeabroaderindicatorofmisconductwithintheorganization?

•  Ifthatemployeeisthetargetofenforcementactions(e.g.,suspension/debarment),whatisthecompany’spolicyandresponse?

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HowDoYouManage/MitigateTheRisks?§  DisclosuresincludemorethanjustFARmandatorydisclosureobligation•  E.g.,variousSAM/FAPIISandotherrepsandcertsarenumerousandcanbecomplicated.Includeupdaterequirementsaswell

§  Beonthelookoutforotherdisclosure“opportunities”•  Pre-acquisitionduediligencemayuncovercorruptpaymentswheredisclosurecouldresultinDOJ/SECdeclination

•  Pairdisclosuredecisionwithcompliancereviewandremediation

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