Tales of kickbacks highlight need for full disclosure

Buylines | Policies, strategies and trends to watch

Steve Charles

Mention the word kickback and visions spring to mind of dealmakers offering Rolexes, Jaguars and Gucci. But government procurement policy-makers will soon be grappling with much more nuanced market behaviors, courtesy of three whistle-blower cases recently filed by the Justice Department against Sun Microsystems Inc., Hewlett-Packard Co., and Accenture Ltd. and its subsidiary Proquire.

Those three cases seek treble damages and civil penalties under the False Claims Act, Anti-Kickback Act and Truth in Negotiations Act, as well as organizational conflict-of-interest provisions and common-law theories of unjust enrichment, breach of contract and payment under mistake of fact.

The cases raise questions about manufacturers' go-to-market strategies in the public sector. In commercial channels, companies balance the need to drive demand and extend sales reach with the legal concerns of anti-competitive and anti-trust legislation. In the government market, companies are finding it increasingly difficult to extend their sales reach. Regardless of the sector and relevant legal constraints, manufacturers will always be looking for ways to reward the demand-generation activities required to sell new technology.

It's interesting to read the lists of alliance, reseller, sales and influence programs mentioned in the cases, illustrating that the balance struck between sales and anti-trust activities must potentially address a series of additional considerations when taxpayer money and public trust are at stake. We have a host of laws and regulations designed to create transparency throughout the procurement process. That transparency has an economic cost. Tweaking the trade-offs between the costs of transparency and the efficiencies of the market is what specialized economists, lawyers, judges, legislators and regulators continually wrestle to limit the potential for corruption in our procurement system.

The cases offer manufacturers and prime contractors a wake-up call to re-examine the processes whereby commercial channel sales and compensation practices are disclosed and monitored in the government market.

Vigorous government contracting and subcontracting compliance programs are necessary at all levels of the government supply chain, the absence of which can now be construed as reckless disregard for the requirements of being a government contractor, subcontractor or supplier and could give rise to civil fraud actions similar to the three cases.

It will take years for the questions raised by those cases to be resolved to the point that the many actors involved ? associations, lobbyists, manufacturers, distributors, resellers, sales agents, consultants, prime contractors, subcontractors, disadvantaged small businesses, auditors, whistle-blowers, the Justice Department, and even the franchise funds and governmentwide acquisition contracting programs ? will understand and agree on which demand-generation activities and payment arrangements violate the Anti-Kickback Act's prohibition against "improperly obtaining or rewarding favorable treatment in connection
with a prime contract or in connection with a subcontract relating to a prime contract."

If the allegations in the three cases are found to violate the Anti-Kickback Act and are thus considered fraudulent, a transaction involving a commission or rebate of $10,000 could result in a claim by the government for $41,000 because of the $11,000 penalty plus treble damages under the False Claims Act. This is serious business.

At the heart of these allegations is the failure to disclose. Disclosure requires significant effort and systematic business processes to maintain direct links with a manufacturer's corporate operations to ensure that all commercial prices, discounting practices and channel programs are rationalized, documented, disclosed and monitored. Clearly any hope of properly obtaining or rewarding favorable treatment in connection with a prime contract or in connection with a subcontract relating to a prime contract begins with current, accurate and complete disclosure.

Steve Charles is co-founder of immixGroup Inc., a government business consulting firm in McLean, Va. E-mail him at steve_charles@immixgroup.com.

About the Author

Steve Charles is a co-founder of immixGroup, which helps technology companies do business with government. He is a frequent speaker and lecturer on technology and the federal procurement process. He can be reached at Steve_Charles@immixgroup.com or connect with him on LinkedIn at www.linkedin.com/in/stcharles.

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