Mandatory Disclosures for Federal Government …...2018/09/25 · fraud, bribery, or gratuity...
Transcript of Mandatory Disclosures for Federal Government …...2018/09/25 · fraud, bribery, or gratuity...
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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