Proposed FAR Mandatory Disclosure Rule Expanded to Include Potential FCA Violations

The government recently proposed an amendment to the Federal Acquisition Regulation (FAR) that would significantly expand the types of possible violations that contractors would be required to disclose to the applicable Office of Inspector General and contracting officer in order to be considered a “responsible prospective contractor” for purposes of FAR Part 9. (See Attachment.)

The government previously proposed, at the request of the Department of Justice, a clause that would require contractors with contracts valued at $5 million or more to notify the relevant Inspector General’s office and contracting officer whenever they had “reasonable grounds to believe” that one or more of their principals, employees, agents or subcontractors had committed a violation of federal criminal law in connection with the award or performance of the contract or any subcontract thereunder (72 Fed. Reg. 64019 (Nov. 14, 2007)). The government now proposes to extend this mandatory disclosure requirement to situations in which the contractor has reasonable grounds to believe that a violation of the civil False Claims Act (FCA) has occurred. The proposed amendment would also extend the mandatory disclosure requirement to commercial item contracts and contracts performed entirely outside the United States. Finally, the proposal would amend FAR Part 9.400 to add as grounds for suspension or debarment the contractor’s “knowing failure to timely disclose” a violation of the FCA or federal criminal law or the receipt of an “overpayment.” (The proposal does not define the terms “knowing,” “timely,” or “overpayment.”)

The proposed FAR mandatory disclosure rule would, if adopted, create significant new burdens and risks for government contractors and subcontractors. Many such contractors and subcontractors would be forced to establish and maintain internal controls sufficient to identify any situation that an agency Suspension and Debarment official, a qui tam relator or a Department of Justice lawyer could later argue provided “reasonable grounds to believe” that a FCA or criminal violation by a principal, employee, subcontractor, or agent of the contractor or subcontractor had occurred. These difficulties will be further compounded by the need to police foreign subcontractors as well as commercial subcontractors both in the U.S. and abroad.

The risks and burdens of complying with the new mandatory disclosure rule would be further aggravated if Congress were to enact the pending amendments to the FCA. Those amendments would, among other things, strip defendants of the right to assert the so-called “public disclosure” defense to FCA qui tam suits and permit government employees to bring such suits. Contractors would then have to decide between narrowly interpreting the “reason to believe” standard for disclosure, thereby risking potential suspension or debarment for a failure to timely disclose, and broadly interpreting that standard to cover all sorts of contract issues, thereby risking “overdisclosure” and the generation of qui tam suits that could previously have been blocked by the “public disclosure” jurisdictional bar.

Comments on the proposed mandatory disclosure rule are due by July 15, 2008.