Rule would require ethics policies for big contractors

Companies with large federal contracts would be required to implement ethics policies to minimize wrongdoing and ensure that employees know how to report incidents, if a recently proposed rule change becomes law.

The proposal, published in the Federal Register earlier this month, would require any government contractor with an award of more than $5 million to institute an ethics compliance system with features including written ethics policies, an ethics training program and the display of posters on how to reach agency inspectors general to report possible wrongdoing.

The new rule would apply only to contracts performed in the United States that last 120 days or more. It mirrors regulations that already govern contracts with the Defense and Veterans Affairs departments and the Environmental Protection Agency.

"In view of the significant sums of federal dollars spent by agencies to acquire goods and services, this rule establishes a clear and consistent policy regarding contractor code[s] of ethics and business conduct, responsibility to avoid improper business practices, and procedures for displaying an agency OIG Fraud Hotline poster to facilitate the reporting of wrongdoing in federal contracting," wrote officials from two acquisition councils in an explanation.

Chris Yukins, co-director of the Government Procurement Law Program at The George Washington University, said the change would be a huge step forward for government contracting, but identified a few shortcomings in the rule as proposed.

First, the draft rule would not provide a blanket requirement for the entire contracting community because it would not apply to companies with only smaller contracts, Yukins noted. The proposal includes a provision that says companies should have a code of ethics and business conduct, but does not require it for all businesses.

"Savvy corporations have a compliance system in place, but naïve contractors will think under this rule that they don't need to have a system in place," Yukins said. He pointed out that under federal sentencing guidelines adopted in 2004, in the case of criminal wrongdoing a company without an ethics compliance system would be more severely punished than one with established procedures.

Yukins said the proposed rule, which mirrors the 20-year-old Defense Federal Acquisition Regulations Supplement, also should be modified to reflect the updated ethics guidelines contained in federal sentencing guidelines. Those were developed partly in response to the Enron corporate accounting scandal, Yukins said, and represent the "cutting edge" in compliance practices.

For those companies that do not already have a system in place, setting up a good compliance regime requires "a substantial amount" of resources, Yukins said, but "an ounce of prevention is much better than a pound of prosecution."

Dick Bednar, coordinator of the Defense Industry Initiative on Business Ethics and Conduct, downplayed the difficulty of compliance.

Echoing Yukins' statement that sophisticated companies already have systems in place, Bednar noted that the proposed rule includes a provision that internal controls be matched to the size of the company and the extent of its federal contracting.

"You'd be surprised that even though we have the sentencing guidelines, and we've had the [Defense rules] for 20 years and the Defense Industry Initiative for 20 years, there's still a ton of medium and small companies out there that do business with the government that still don't get it," Bednar said. "They think that if they get caught up short somewhere, they'll just muddle through."

"This would not be necessary if those companies that contract with the federal government had opened their eyes long ago and realized that the government expects government contractors to govern themselves," he said.

Comments on the proposed rule will be accepted until April 17, and can be submitted through the Federal eRulemaking Portal under FAR Case 2006-007.