Business ethics the latest addition to FAR

Infotech and the law | Legal insights for today's market

In the last week of 2007, a new subpart to the Federal
Acquisition Regulation took effect that requires contractors to
establish a code of business ethics and conduct. It also requires
them to take other steps to promote business ethics and early
discovery of improper conduct in the performance of government
contracts. Additional measures to promote contractors' ethical conduct
proposed in November will be issued later this year.

Under the rule, contractors must have a
written code of business conduct and ethics,
provide a copy to all employees working on
the government contract, and promote compliance
with the code among the contractor's
employees. This requirement applies to all
contracts valued at more than $5 million or
for which the period of performance is 120
days or more.

In addition, unless the contractor is a
small business, the contractor must institute
ongoing business ethics training
for its employees. The contractor
also must establish an
internal control system to
facilitate timely discovery of
improper conduct in connection
with the performance of
government contracts and ensure that corrective
actions are promptly taken. This
internal control system should provide for:
  • Periodic reviews of company business
    practices, procedures and controls to
    ensure that the ethics code is enforced
    and employees follow the special requirements
    of government contracting.
  • An internal reporting mechanism, such
    as a hotline, for employees to report suspected
    improper conduct.
  • An audit program designed to discover
    improper activities related to government
    contracts.
  • Disciplinary measures for employees who
    violate the code of conduct or government
    contracting rules.

If a contractor does not have a business
ethics policy or an internal control system
in place at the time of contract award, the
contractor must establish the policy within
30 days and the internal control system
within 90 days.

Contractors with contracts valued at
more than $5 million also must display a
hotline poster approved by the contracting
agency that informs employees how to
report suspected unethical conduct.

These requirements also apply to subcontractors
of other than noncommercial
items if the subcontract is valued at more
than $5 million or will require more than
120 days to perform. The prime contractor
is not required to judge or monitor the subcontractor's
ethics program but is required
to see that it exists.

These new requirements, already in
effect for contracts awarded after Dec. 24,
2007, may be enhanced by additional
requirements later this year if another
proposed rule becomes final. The proposed
rule also would apply to noncommercial
item contracts performed in the
United States and valued at more than
$5 million or requiring more than 120
days to perform.

It would add minimum standards for
the contractor's ethics awareness program
and require regular training for
the contractor's owners, employees and
subcontractors. It also would set standards
for the contractor's
internal control system,
including monitoring and
auditing for criminal conduct,
assessments of the
risk of criminal conduct
and steps to reduce those
risks, and discipline for those failing to take
reasonable steps to prevent criminal conduct
by workers under their supervision.

The most significant addition is that the
proposed rule would require a written
report to the procuring agency's inspector
general whenever the contractor has reasonable
grounds to suspect that a principal,
employee, agent or subcontractor has violated
procurement law. The contractor would
then be required to cooperate with government
in any subsequent investigation.

Jonathan Cain (jtcain@mintz.com) is a member of
law firm Mintz Levin.

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