Compliance with FAR Ethics Requirements -...

Compliance with FAR Ethics Requirements

February 8, 2011

Disclaimer: Information is for general guidance only. Some of the information is legal in nature and legal advise should be sought for

your individual companies requirements and needs.

Proprietary & Confidential 1

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Introductions

• Moderator: – Christine Williamson, Watkins Meegan

• Panelist – Rick Westerman, Watkins Meegan – Joe Smith, Smith Pachter – John Pachter, Smith Pachter


Agenda

– Background of Key Contractor Ethics Regulations – Flowchart Requirements & Compliance – Code of Conduct, Awareness Program & Internal

Controls (Gotcha items) – Hotlines & Whistleblowers – Federal Laws, Fines, Penalties – example of cases – What is a Monitor? – Ten Commandments for Gov Contractor – Questions



A Brief History of Key Regulations

• 1986 - Packard Commission by President Reagan recommended that defense contractors promulgate and vigilantly enforce codes of ethics and internal controls to monitor compliance – 32 major contractors formed the “Defense Industry

Initiative on Business Ethics and Conduct” • 1991 – US Sentencing Guidelines came up with 7

(minimum) guidelines for use in sentencing corporations and corporate employees found guilty of ethics-related crimes.



Original FAR Paragraph

• FAR 3.1002(a): “Government contractors must conduct

themselves with the “highest degree of integrity and honesty.”

But, it wasn’t enough.



Cases Leading Up to FAR Change • 2004 – HealthSouth Corp agreed to pay $325 million for

false claims. • 2005 – Tenet Healthcare and St. Barnabas Corp. accused of

fraudulently inflating patient care cost – combined fine of $1.18 billion

• 2006 – Boeing Co. agreed to pay $615 million to resolve allegations of procurement fraud

• 2007 – Sioux Manufacturing and Hexcel Corp agreed to pay a combined $17 million for sale of faulty body armor

• 2008 – Merck & Co agreed to pay $362 million in a qui tam claim that it failed to provide the government its best price and paid kickbacks to prescribing physicians Proprietary & Confidential 6


More Events & Facts Causing Reform • Significant ground swell in Ethics &

Governance starting with public companies (SOX)

• Department of Justice focus on Fraud via National Procurement Fraud Taskforce

• No real Government-wide regulatory requirement for a code of ethics

• Defense Federal Acquisition Regulation Supplement (DFARS) recommended but didn’t make a code mandatory



Key Revisions Effective Dec, 2008

• Subpart FAR 3.1003, 4 • FAR 52.203-13 & 14

– Code of Business Ethics and Conduct (13) – Employee Awareness Program (13) – Internal Control System (13) – Disclosure to the Government of certain violations

(13) – Reporting Mechanism – Hotline (14)



Greater Contract Responsibility

• Burden has shifted to the contractor to institute anti corruption practices

• Government no longer wants to catch the mistakes……now expects you to catch them on your own

• Timely Reporting is a must



LET’S FLOWCHART 52.203-13 REQUIREMENTS

LEFT SIDE OF THE FLOWCHART



Who Must Comply?

• Contracts over $5,000,000 and a performance period of more than 120 days

• Includes Subcontracts • Could Apply to

– Recipient of Federal Funds…many States adopt FAR

• Public Companies have ethics programs due to SEC requirements



What are the Minimum Requirements

• Unless extended by CO, within 30 days of the contract award, the contractor must have a code of business ethics and conduct written and provided each employee working on the project.

• Have procedures to prevent or detect criminal conduct and promote an ethical culture

• Timely disclose to OIG and CO violations of Federal criminal law

• Note: regardless of required adherence to this section, subpart 3.1003 requires timely disclosure for 3 years after payment



What is a Code of Conduct?

Lockheed-Martin program "Setting the Standard"



Code of conduct

1. Our Commitments 2. Obey the Law 3. Promote a Positive Work Environment 4. Work Safely: Protect Yourself, Your Fellow

Employees and the World We Live in 5. Keep Accurate and Complete Records 6. Make Accurate Public Disclosures 7. Record Costs Properly 8. Strictly Adhere to All Antitrust Laws 9. Know and Follow the Law When Involved in

International Business 10. Know and Follow the Law and Use Common Sense

in Political Contributions and Activities 11. Know and Follow the Rules in Using or

Working With Former Government Officials

12. Maintain the Integrity of Consultants, Agents and Representatives

13. Protect Proprietary Information 14. Obtain and Use Company and Customer

Assets Wisely 15. Do Not Engage in Speculative or Insider

Trading 16. Business Conduct Compliance

Training Modules 17. Warning Signs 18. Quick Quiz 19. Our Goal: An Ethical Work Environment 20. Accountability 21. How to Contact the Audit

Committee 22. Contact the Ethics Office

Table of Contents


http://www.lockheedmartin.com/index.html�


Model Contractors based on the Ethisphere Institute Ranking (08):


Best Ethics Programs Overall U.S. Gov Business

Rank

Organization

Ethisphere Ethics

Program Total Score

Classification

Ethisphere Best

Ethics Program

Rank

104 Verizon Wireless 97.38 excellent 1

68 Rockwell Collins 94.32 excellent 2

16 Fluor Corporation 93.92 excellent 3

46 CACI International Inc 93.14 excellent 4

30 Textron Inc 93.10 excellent 5

15 General Electric Company 92.43 excellent 6

379 Avaya Inc 92.09 excellent 7

19 EDS 90.95 excellent 8

129 Procter and Gamble 90.51 excellent 9

8 Science Applications International Corp (SAIC) 90.00 excellent 10

1 Lockheed Martin Corp 89.71 above standard 11


How should you document?

Documentation of compliance is critical in case of audit:

• Require employee signatures attesting to attendance at annual ethics sessions

• Require new hires to acknowledge receipt and understanding of code of compliance

• Obtain written statements from departing employees whether improper actions or deviations from company policies were observed



What’s Required if I am a Small Business?

If contractor is a Small Business, defined by the SBA or contract is for commercial item: • do not have to implement an ethics

awareness training program or internal control systems.



Not Required although Good Practice

• It has been highly recommended that contractors implement compliance programs even if not required by the FAR. – A good defensive position against improper

practices – Agencies can set lower compliance thresholds

and it is the contractor’s responsibility to find out if its customer has set a lower level for compliance.



Awareness and Internal Controls

• Within 90 days after the contract award, the contractor must establish:

–An ethics and business conduct awareness program; and

–An internal control system



Business Ethics Awareness and Compliance Program

• Implement Fraud Prevention Program • Promote an ethical culture including

compliance with the law • Conduct Effective Training of Principals,

Employees and as appropriate Agents and Subcontractors

• Use Sentencing Guidelines



What are the requirements for the internal control system?

A. Facilitate timely discovery of improper conduct B. Ensure corrective measures are promptly

instituted C. Assign responsibility for awareness,

compliance and internal controls at a sufficiently high level

D. Reasonable efforts to exclude as a principal individuals who have violated the organizations code of ethics and conduct

E. Perform periodic reviews



The Contractors Internal Control System (continued)

F. Periodic reviews of business practices, procedures, policies, and internal controls for compliance with the Contractor’s code of business ethics and conduct and the special requirements of Government contracting;

1. Monitoring and auditing to detect criminal conduct 2. Periodic effectiveness evaluation of ethics, compliance

and internal control system, especially if criminal conduct is detected

3. Periodic assessment of risk of criminal conduct with steps to reduce risk of criminal conduct

4. Disciplinary action for improper conduct 5. Timely disclosure to OIG, CO for up to 3 years beyond

final payment on contract. 6. Full cooperation with agencies responsible for audit,

investigations or corrective action



Key Gov Contractor Accounting Internal Controls

• Accurate & effective accounting systems for cost estimations, accumulation and submissions – Federal Acquisitions Regulations/Cost Accounting

Standards – Billing – Time collection – Indirect rate calculation – Government owned property.......



Meals to Govt Employees

Under the Standards of Ethical Conduct for Employees of the Executive Branch, a “Gift” is defined to include a meal over $20. 5 C.F.R.§ 2635.203 (b)

A person prohibited from giving gifts includes a government contractor. § 2635.203 (d)



Campaign Contributions • 11 CFR 115.2 General Limitation: Federal Contractor cannot make either directly

or indirectly any contribution of money or other thing of value to any political party, committee, or candidate for Federal Office. However, the employee of a Federal Contractor can make contributions from their personal funds.

• 11 CFR 115.3 Corporations, labor organizations, membership organizations, cooperative and corporations without capital stock: Federal Contractors that are set up as corporations can use treasury funds to establish, administer, and solicit contributions to a separate segregated fund, more commonly known as a political action committee (PAC).

• 11 CFR 115.4 Partnerships: A Federal Contractor that is a Partnership cannot use the assets of the Partnership to make contributions or expenditures in connection with a Federal election. However, individual partners can make contributions in their own names from their personal assets.

• 11 CFR 115.5 Individuals and Sole Proprietors: A Federal Contractor who are individuals or sole proprietors are prohibited from making contributions or expenditures from their business, personal or other funds under their dominion or control in connection with a Federal election. Their spouse, however, is not prohibited from making a donation in their name.



LET’S FLOWCHART 52.203-14 REQUIREMENTS

RIGHT SIDE OF THE FLOWCHART



Government Hotline Posters



Where/When do I display posters?

• During contract performance • Display in common areas and at site • Electronic if website available

– Any agency or DHS poster identified by contracting officer

unless – Contractor has implemented an awareness

program (DHS may still be required)



What are the laws they can use? • False Claims Act – 31 U.S.C. § 3729 • False Statements Act - 18 U.S.C. § 1001 • Contract Disputes Act - 41 U.S.C. § 601-613 • Forfeiture Statute - 28 U.S.C. § 2514 • Anti-kickback Act – 41 U.S.C. §54 • Truth in Negotiations Act – 10 U.S.C. §2306 • Bribery and Gratuities Statutes – 18 U.S.C. §201-208 • Mail and Wire Fraud Statutes – 18 U.S.C. §1341 and 1343 • Procurement Integrity Act – 41 U.S.C. §423 • Bid Rigging and Collusive Bidding – 15 U.S.C. §1 • Suspension and Debarment – FAR 9.406-2 & 9.407-2



What and Who is at risk? • Potential suspension or debarment if an ethical violation is

found.

• Potential criminal prosecution of corporate officers and employees who – Sign contracts

– Sign payment applications

– Sign change orders

– Certify to percentage of completion

– Certify claims

– Oversee compliance programs



How do penalties get assessed?

• In the event of a violation of law, a contractor’s failure to have a program in place will be evidence used to determine punishment-the same standard currently in place for judges to use in sentencing companies found guilty of violating federal law.

• Sentencing Guidelines come into play and culpability score

• The less evidence you have a program the more the courts are instructed to be tough on sentencing



Enforcement Action Trends

• Data based on information obtained from Project on Government Oversight Federal Contractor Misconduct Database; www.pogo.org • Federal agencies. Violation categories include Cost/Labor Mischarge, Ethics, Government Contract Fraud, Grant Fraud, Poor Contract Performance


-

5

10

15

20

25

30

35

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Quantity Bi

llion

s

Year Amount Cases

Boeing - $615 Schering-Plough - $435 Merck - $138

http://www.pogo.org/�


Cases Last Year (2010)


• BAE Systems – FCPA violation, design flaws • Novartis AG – False Claims on unapproved drug • CH2M, Fluor – Purchasing Card Fraud • Chugach Management – Over billing of steel • Northrop Grumman – False Claim of hotel bills • Culbertson/Raytheon – False Claim, employee

expense fraud


What happens if I report something?

Whistle-blowers must be protected (52.203-15) Under the Fraud Enforcement and Recovery Act of 2009 (FERA), whistleblowers who are retaliated against now are entitled to (1) reinstatement with same seniority status; (2) double back-pay; (3) any “special damages”; and (4) attorney’s fees.

Relief from Retaliatory Actions, 31 U.S.C. 3730(h)



What happens if you don’t comply

• Fines, Suspension, Debarment, etc • Excluded Parties List • A “Monitor” could be required by the

Government to “look after” your company – Selected and paid by the Company – Approved by the Agency – Operates independently from both the contractor and

the government – Reports back to the government on compliance – Period of 1-3 years



Responsibilities of the Monitor • Examine Code of Conduct and Code of Ethics • Examine whether company has a culture of ethics

and compliance; whether management and employees live the values espoused by management

• Review and critique training materials and training sessions

• Review internal procedures with emphasis on risk assessment

• Review business procedures to determine whether Ethics and Compliance is inserted into business routine



Responsibilities of the Monitor

• Review procedures for reporting misconduct, establishing discipline and corrective measures

• Examine results of complaint investigations to assess whether company response is appropriate

• Review procedures for escalation of potential disclosure issues to appropriate management officials

• Interview management and compliance officials and meet with Board of Directors to assess “tone from the top”



Responsibilities of the Monitor

• Review results of surveys and focus groups regarding ethics and compliance

• Interview employees on random basis • Report to agency Debarment and Suspension

Official and Department of Justice Ultimate Question:

Does the contractor exhibit “present responsibility”?



Ten Commandments of Gov Contractor

I. Deal honestly with each other, your customers and suppliers.

II. Keep accurate and complete financial records.

III. Avoid conflicts of interest, bribes, gratuities and kickbacks.

IV. Maintain a safe, healthy workplace. V. Engage in fair competition.



Ten Commandments of Gov Contractor

VI. Preserve the environment. VII.Safeguard classified information, IP and

proprietary information. VIII.Avoid unauthorized exports. IX. Be fair and non-discriminatory in

employment and promotion. X. Encourage reporting and embrace non-

retaliation.



Recap

1) an in-person training of all employees who might possibly work on federal projects, so that there can be Q&As, followed up by;

2) a web-based (or in-person) training for those who couldn't be there in person and for new hires, with verification that they attended;

3) a booklet summarizing the requirements that is given to all trainees and signed for;

4) a corporate code of business ethics that is posted to employees;



Recap

5) preparation and posting of posters advising employees about the program and how to make complaints;

6) a toll-free number for "hot-line" calls; 7) a system for monitoring that hot-line number, a

protocol for saving/transcribing messages, a review and analysis of the messages;

8) a system for investigation of complaints of suspected violations;



Recap

9) a system for monitoring ethics compliance; 10)a system for auditing contracts for ethics

compliance; 11)a system for training the Ethics Compliance

officer; 12)A system for protecting whistle-blowers; and 13)annual refresher and update training for all.



How to get started – Assess your code of conduct – Work with legal counsel as needed – Communicate ethics and code – Establish effective reporting mechanism (hotline) – Begin reviewing internal controls using a risk based

approach

• Programs have to be woven into fabric of organization

• Must walk the talk/Tone at the Top



QUESTIONS?



About Rick Westerman • Rick Westerman has significant accounting operations and automated systems expertise, providing forensic accounting and

litigation support in both corporate and consultancy roles. Rick is an adjunct professor and teaches forensic accounting at Catholic University of America. Rick has provided litigation support in breach of trust actions through detailed review and reporting on offshore bank operations and accounting record accuracy; actions of employee fraud including business record analysis, interview and court testimony; contract disputes related to software implementation services and functionality, third party administration of services and vendor claims. Since joining the firm in 2006, Rick has also provided acquisition due diligence, risk assessment, and financial accounting support for numerous entities in both the private and government sectors. He has presented at numerous conferences and led several seminars on internal controls and corporate governance.

• As a former CFO of a $170 million manufacturer, he led initiatives supporting a $42 million working capital improvement

program including vendor terms management, receivables collection strategies and inventory efficiency programs. He was an executive team leader in a $5 million enterprise resources planning software implementation with full responsibility for financial modules and he led the corporate wide budget preparation, executive review and presentation to Board of Directors and major financial institutions.

• Rick also served as Director of Internal Audit for a $300 million vertically integrated manufacturer and retailer where he

implemented a Sarbanes-Oxley based Committee of Sponsoring Organizations (COSO) audit approach. Rick structured the audit function by using risk modeling questionnaires and aligning efforts with management strategies and he led due diligence efforts including preparation and execution of checklists and report presentation to executive management, external auditors and the Board of Directors.

• Rick is a graduate of Roanoke College, with a Bachelor of Business Administration degree. He is a Certified Public

Accountant, a Certified Mergers & Acquisitions Advisor, a Certified Fraud Examiner and he is Certified in Financial Forensics. He is a member of the Association of Certified Fraud Examiners, the American Bar Association’s White Collar Crimes Committee and the American Institute of Certified Public Accountants. Rick has provided testimony in numerous cases.



About Christine Williamson • Christine Williamson, who began her career at Watkins Meegan in 1991, manages the day-to-day business

operations of the Government Contracting group, including scheduling, hiring and business development. Additionally, Christine provides financial and accounting consulting and business services to a variety of clients. She specializes in developing solutions to complex issues, such as the development of indirect rate structures and tax ramifications of acquisitions.

• Christine possesses a wealth of knowledge in Generally Accepted Accounting Principles (GAAP) and tax

compliance issues. She advises clients on financial and operational issues, including general ledger chart-of-accounts, account reconciliation, monthly and year-end closings, financial statement reporting and maintenance and federal and state taxes. Her industry experience and financial expertise has positioned her as a trusted advisor to clients and businesses, both of whom appreciate her creative thinking and problem-solving skills.

• Christine is an expert with Deltek accounting software products for both small and large companies and often

serves in an advisory capacity for companies that are interested in customizing and incorporating the Deltek system. She was instrumental in forming a partnership between Watkins Meegan and Deltek to offer software implementation and consultation to clients using the Deltek GCS Premier product.

• Christine is a graduate of the University of Maryland with a Bachelor of Science degree in Accounting. She is a frequent teacher and lecturer for Watkins Meegan, Deltek and Lorman Education Services on a variety of specialized topics. Christine is a member of the Virginia Society of Certified Public Accountants and the American Institute for Certified Public Accountants. She has been instrumental in the success of both the Watkins Meegan Women’s Leadership Initiative and the firm-wide Employee Wellness Initiative. In addition, she has received Virginia Business magazine’s “Super CPA” award several times.



About John Pachter A practitioner of government contract law for more than 40 years, Mr. Pachter has engaged in substantial litigation before the Boards of

Contract Appeals, the United States Court of Federal Claims, Federal District Courts, and the United States Court of Appeals for the Federal Circuit. He has prosecuted bid protests before the Government Accountability Office, the General Services Board of Contract Appeals, the United States Court of Federal Claims and Federal District Courts. Mr. Pachter’s practice has involved dispute resolution in all areas of government contract law, including prime-subcontractor disputes, both in litigation and under alternative dispute resolution procedures.

In the bid protest area, Mr. Pachter’s practice has involved agency best value determinations, past performance, meaningful discussions, task order contracts, sample task issues, organizational and personal conflicts of interest, cost realism analyses, competitive range controversies, technical evaluations, bid mistakes, and other issues.

Mr. Pachter has represented a number of clients in the debarment area, and obtained the first reversal in federal court of a Service Contract

Act debarment. Federal Food Service, Inc. v. Donovan, 658 F.2d 830 (D.C. Cir. 1981). He has also represented and counseled clients on fraud and compliance investigations, audits, corporate governance and ethics, and defense of qui tam actions. Other work has included defective pricing, cost determination, requests for equitable adjustment, licensing of intellectual property, subcontractor performance issues, small and small disadvantaged business matters, terminations for default and convenience, GSA schedule contracts, task order contracting, multiple awards, commercial products and requests for government information.

In October 2007, the Department of the Army appointed Mr. Pachter to serve as Independent Monitor to supervise ITT Corporation's

performance under an Administrative Compliance Agreement. ITT entered into that Agreement in connection with a Guilty Plea and Deferred Prosecution Agreement regarding violations of the Arms Export Control Act at the Night Vision component of ITT Defense Electronics & Services.

In 2004, the Legal Times recognized Mr. Pachter as a Leading Lawyer in Government Contracts. He has also been listed in Virginia Super Lawyers, and in Chambers USA, America's Leading Lawyers for Business. In 2007, Chambers USA included Mr. Pachter on its list of Nationwide Leading Lawyers.

George Washington University (J.D., with honors, 1966)

George Washington University (L.L.M. in Government Procurement Law, 1970) Tulane University (B.A., 1963) Former Faculty Member, George Washington University Law School, Government Contracts Program. Adjunct Professor, 1974-1980, The George Washington University, Dept. of Engineering Admin, School of Engineering and Applied Science U.S. Army, Judge Advocate General’s Corps, 1966-1970; Trial Attorney (Contract Appeals Division), 1969-1970



About Joe Smith Mr. Smith has extensive experience with government contracts experience with various law firms in Washington, D.C. as well as nine

years of experience as CEO and General Counsel of two biotechnology firms. Mr. Smith has represented both large and small companies in a wide variety of government contract matters. In the area of contract claims and disputes, he has appeared as lead counsel in both the Armed Services Board of Contract Appeals and the Court of Federal Claims as well as numerous federal district courts. He has conducted oral arguments before the Federal Circuit, the District of Columbia Circuit and the Eleventh Circuit. The subject matter of these claims and disputes has ranged from highway construction to retirement benefit costs to radar jammer technology. Mr. Smith has also conducted mini-trials, arbitrations and alternative dispute resolution proceedings.

In the area of cost principles and Cost Accounting Standards (CAS), Mr. Smith has defended contractors against allegations of CAS noncompliance, including the proper treatment of pension costs as well as continuing costs associated with divested business units. These cost accounting issues were frequently raised in connection with the close out of overhead years, and Mr. Smith prepared position papers used in negotiations between the contractor and the Defense Contract Management Agency (DCMA) and the Defense Contract Audit Agency (DCAA). Mr. Smith has handled many defective pricing claims under the Truth in Negotiations Act (TINA). Mr. Smith has performed due diligence and has been active in drafting agreements with respect to many mergers and acquisitions, including some of the largest transactions in the defense industry. He has represented both divesting companies and acquiring companies. In the area of fraud, waste and abuse, Mr. Smith has represented numerous corporate clients and, on occasion, individuals. His work on these cases has included conducting internal investigations. In addition to government contracts matters, Mr. Smith has obtained injunctive relief for clients in cases involving the wrongful appropriation of intellectual property and confidential company information. In one case, federal marshals seized computers and discs that contained programs and other data that were wrongfully taken from his client. As an in-house lawyer and CEO for two start-up biotechnology companies, Mr. Smith was involved in negotiating and drafting agreements with investment banks and venture funds. He also drafted and negotiated several research collaboration agreements with major pharmaceutical companies, including Aventis, Merck, Bayer and others. He has prepared private placement memoranda and developed appropriate capitalization structures for start-up companies. As a result, Mr. Smith has a unique understanding of the practical problems that companies face, and his advice and counsel reflect this experience. Education and Educational Achievements Yale Law School (J.D. 1974) S&H Foundation Fellow Yale University (M.A. Political Science 1974);



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