Legal Insights

For some time now, OCIs have been a primary target for regulatory reforms, but now… PCIs?

Background

On November 13, 2009, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (FAR Councils) announced a proposed rule requiring contractors to take sweeping action related to personal conflicts of interest (PCIs) held by employees performing “acquisition functions closely associated with inherently governmental functions.”[1]  Such functions include supporting or providing advice or recommendations with regard to the following activities of a federal agency:

1. Planning acquisitions
2. Determining what supplies or services are to be acquired by the Government, including developing statements of work
3. Developing or approving any contractual documents (e.g. documents defining requirements, incentive plans, and evaluation criteria)
4. Evaluating contract proposals
5. Awarding, administering, or terminating government contracts
6. Determining whether contract costs are reasonable, allocable, and allowable

The rule, which was mandated by language in the 2009 Defense Authorization Act, will create a new Federal Acquisition Regulation (FAR) subpart requiring contractors subject to the rule to (1) obtain and monitor certain employees’ financial disclosure statements; (2) prevent certain employees from using information obtained through the performance of contracts for personal gain; and (3) implement compliance systems to prevent personal conflicts of interest.[2]

The rule defines “personal conflict of interest” as “a situation in which a covered employee has a financial interest, personal activity, or relationship that could compete with the employee’s ability to act impartially and in the best interest of the Government when performing under the contract.” The rule notes that PCIs can develop through the financial interests of the employee or close family members, other employment or prospective employment opportunities, or through the receipt of gifts. 

New Requirements

Under the proposed rule, contractors holding contracts that exceed the simplified acquisition threshold and include a requirement for services involving the performance of “acquisition functions closely associated with inherently governmental functions” will be subject to three new requirements:

1) Contractors must obtain, maintain, and update financial disclosure statements from all employees performing “acquisition functions closely associated with inherently governmental functions” (“covered employees”).  As a result, covered contractors will need to implement new systems for recording, monitoring, and archiving disclosure statements while maintaining an awareness of employee-privacy rights.  

2) Contractors must prevent employees with access to “nonpublic government information” from using it for personal gain. The rule defines nonpublic government information as:

[A]ny information that a covered employee gains by reason of work under a Government contract and that the covered employee knows, or reasonably should know, has not been made public.

Under the rule, the contractor has a duty to ensure that its employees do not utilize such information for public gain. Beyond requiring that covered employees be informed of their ethical obligations and made to sign nondisclosure statements, the rule does not specify how contractors should go about monitoring and preventing employees’ (private) use of such information.   

3) Finally, contractors holding contracts subject to the proposed rule will be required to implement a compliance system that includes:

1. Procedures to screen for potential PCIs
2. Informing “covered employees” of their obligations with regard to the rules
3. Maintaining effective oversight to verify compliance
4. Reporting any conflict-of-interest violations to the contracting officer
5. Taking appropriate disciplinary action with employees who fail to comply with these policies
6. Report to the contracting officer any PCI violation by a covered employee, including actions taken by the contractor in response to the violation

In addition, prime contractors may be responsible for regulating subcontractor compliance with this clause if the subcontract is valued at over $100,000 and includes covered activities.

Analysis

PCI rules have long existed for government procurement personnel, but the proposed rule is the first attempt to codify procedures for eliminating and preventing PCIs among contractor employees.  As contractors have assumed a more pervasive role in performing the type of work that was once performed exclusively by government employees, the powers that be have decided that contractors should be overseen like government employees.

The FAR Councils’ use of the somewhat ambiguous term “inherently governmental function” makes it difficult to predict how contract officers will apply the new clause. The Office of Management and Budget (OMB) is currently reviewing this definition, but, in the meantime, contracts must wait to see how the new clause will be interpreted on the ground.

In any event, contractors should take this provision seriously. The proposed rule creates significant new compliance requirements for contractors with covered employees. It institutes potentially burdensome obligations on contractors to monitor such employees’ financial information and to proactively prevent the improper use of certain government information. 

Contractors have a proactive responsibility under the proposed rule to implement new compliance programs and to make disclosures to the government if they find a PCI during contract performance. In the event that the contractor violates the proposed rule, the contracting officer may suspend contract payments, take possession of the award fee, terminate the contract, or suspend/debar the contractor from government contracting. Additionally, since contractors will be required to certify adherence to the new rule, False Claims Act liability may result from noncompliance.

Interested parties should submit written comments to the FAR Regulatory Secretariat on or before January 12, 2010 to be considered in the formulation of a final rule.

Written by: Samuel Jack

[2] The rule will amend the Federal Acquisition Regulation (FAR) to add subpart 3.11 “Improper Business Practices and Personal Conflicts of Interest” and contract clause FAR 52.203-16, as required by § 841(a) of the Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 (Pub. L. 110- 417).