Mandatory Disclosure Rules & Compliance Requirements for Government Contractors

When it comes to the Federal Acquisition Regulation (“FAR”) Mandatory Disclosure Rules (MDR) under FAR 52.203-13 and FAR 52.203 3 many DOD contractors wonder what they must disclose to the government after the contract award has been awarded the contract, if anything. Before they can figure it out, many often find themselves under a federal government investigation due to a whistleblower complaint or some other form of information presented to the government.

Companies can make mistakes. However, if the agency perceives that you or your company is hiding something, it is hard to “unring the bell.” The bottom line is that if you are aware that there is evidence that you are not in FAR compliance, there is overpayment or something else, then you have to self-disclose to the government.

What is the FAR Compliance & Mandatory Disclosure Rule and Its Applicability?

The “mandatory disclosure” rules for government contractors appears in FAR 52.203-13 (Contractor Code of Business Ethics and Conduct); and FAR 9.406-2 (Causes for Debarment) and FAR 9.407-2 (Causes for Suspension).

Under FAR compliance requirements for government contractors, your company must  timely disclose, in writing, to the agency Office of the Inspector General (OIG), with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of the prime contract or any subcontract thereunder, the Contractor has credible evidence that a principal, employee, agent, or subcontractor of the Contractor has committed—

• A violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code; or
•  A violation of the civil False Claims Act (31 U.S.C. 3729–3733).

(emphasis added).

What Does FAR 52.203 3 Cover?

FAR 52.203-3 (Gratuities) covers the requirement for government contractors to have a reporting procedure in place, and to be able to provide timely written notification of any violations of Federal criminal law or civil False Claims Act as they are uncovered. This requirement is designed to promote honest business practices by contractors and subcontractors working with Federal agencies. The contractor shall also have procedures to detect and prevent any such violations. 

The right of the Contractor to proceed may be terminated by written notice if, after notice and hearing, the agency head or a designee determines that the Contractor, its agent, or another representative-

(1) Offered or gave a gratuity (e.g., an entertainment or gift) to an officer, official, or employee of the Government; and

(2) Intended, by the gratuity, to obtain a contract or favorable treatment under a contract.

(b) The facts supporting this determination may be reviewed by any court having lawful jurisdiction.

(c) If this contract is terminated under paragraph (a) of this clause, the Government is entitled-

(1) To pursue the same remedies as in a breach of the contract; and

(2) In addition to any other damages provided by law, to exemplary damages of not less than 3 nor more than 10 times the cost incurred by the Contractor in giving gratuities to the person concerned, as determined by the agency head or a designee. (This paragraph (c)(2) is applicable only if this contract uses money appropriated to the Department of Defense.)

(d) The rights and remedies of the Government provided in this clause shall not be exclusive and are in addition to any other rights and remedies provided by law or under this contract.

It is important to note that a contractor can be held liable for failing to provide timely written notification of any criminal law or false claims act violation uncovered by the Contractor’s employees, officers, agents, or subcontractors. The contractor may be subject to suspension or debarment, or other administrative sanctions, if it fails to comply with these requirements. It is important for a contractor to have clear and accessible policies and procedures in place to ensure FAR compliance with these reporting requirements. This will help protect both the Federal agency and the contracting entity from any potential liability associated with failure to report violations.

Under other FAR regulations, the mandatory disclosure requirements are mentioned. For example, FAR 9.406-2 and 9.407-2, indicate that the Federal Government can choose to debar or suspend your company for a:

Knowing failure by a principal, until 3 years after final payment on any Government contract awarded to the contractor, to timely disclose to the Government, in connection with the award, performance, or closeout of the contract or a subcontract thereunder, credible evidence of—

(A) Violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code;

(B) Violation of the civil False Claims Act (31 U.S.C. 3729–3733); or

(C) Significant overpayment(s) on the contract, other than overpayments resulting from contract financing payments as defined in [FAR] 32.001[.]

The FAR mandatory disclosure rules mandate that government contractors disclose in writing all situations for which they have credible evidence of a potential violation of the civil False Claims Act or Federal criminal law involving fraud, conflict of interest, bribery, or gratuity. Note that this is not just a requirement for actual violations but also potential violations.

The FAR requires that you make disclosures to the respective Office of Inspect”) for the contracting agency or Department that was party to the contract or order. You are also required to disclose credible evidence of “significant overpayments.”

• If you fail to disclose, your company can be suspended or debarred
• failure to meet FAR requirements for government contractors could also lead to investigations or criminal liability

Contracts in the amount of $5.5 million or more or run for more than 120 days. However, companies on GSA schedule must pay special attention and not simply apply the general rule. Failure to meet the mandatory disclosure requirements can land a company into the suspension and debarment realm.

Even if companies think that an overpayment may be too small, they should take chances. Contractors selling commercial items or small businesses are not statutorily required to have these processes in place. However, these companies are always open to False Claims and other types of liability. Therefore, having proactive policies and corrective action controls in place.

Who Can Disclose?

According to procurement laws, any individual, including a director, an officer, your employee, or an independent contractor, authorized to act on behalf of the contractor, can make contractor self-disclosures. Agents may include partners, consultants, or attorneys. If someone other than a senior company official signs the contractor self-disclosure, OIG will verify the authorization of the individual making the self-disclosure. If for some reason you are not authorized to submit a disclosure on behalf of the contractor, your disclosure will be treated as a tip.

When to Disclose?

When you have credible evidence, there is no deadline. However, you cannot be aware of evidence and then turn a blind eye. The intent of the statute is for you to act in a reasonable time.  See the preamble to the final “mandatory disclosure” rule  (73 Fed. Reg. at 67,074).

Questions that apply can include:

What is credible evidence that drives the duty to disclose?

What is the standard for overpayment?

What should you pass down to subcontractors?

Certificate of Compliance with Mandatory Disclosure When do you have to disclose?

The Federal Acquisition Regulation (“FAR”) requirements were amplified in 2008 as related to a contractor code of business ethics and conduct, an internal controls system, and mandatory disclosure requirements of certain criminal violations, the False Claims Act (FCA), and significant overpayments. 

The FAR Mandatory Disclosure Rule, published by the FAR Councils on November 12, 2008, requires that provide a Certificate of Compliance with Mandatory Disclosure at the bidding stage and to the contracting agency potential violations of criminal and civil law and instances of significant overpayment). 73 Fed. Reg. 67064; see 50 GC ¶ 439 (Dec. 17, 2008). 

The MDR also includes included a new section under the Federal Acquisition Regulations that address contractor business ethics and conduct, applicable to certain covered contracts and requiring disclosure of potential wrongful conduct.

The Rule also addressed the new definition of “present responsibility.” Also, federal contractors and subcontractors, regardless of whether they are subject to the new FAR clause, can be subject to suspension and debarment for failure to timely disclose potential wrongful conduct or significant overpayments.

• The MDR now allows for contractor suspension or debarment of a contractor who knowingly fails to timely disclose violations to the agency in a prompt manner.
• Many small businesses are still not compliant with this important rule.
• Evidence can be found in many of the FCA cases and suspension and debarment cases.

Certificate of Compliance with FAR Mandatory Disclosure Rules

When it comes to your obligation under contractor ethics and FAR mandatory disclosure rules, contractors and employees must timely disclose via a certificate of compliance with mandatory disclosure, in writing to the agency Office of the Inspector General, with a copy to the Contracting Officer, when, in connection with the award, performance, or closeout of the contract or any subcontract, the contractor has reasonable grounds to believe that a principal, employee, agent, or subcontractor has committed a violation of federal criminal law, involving fraud, conflict of interest, bribery, or gratuity violations, or the False Claims Act. See How to Minimize Criminal Liability in Government Contract Fraud.

• Companies have to show that they are making an internal culture for preventing problems.
• This is something that Suspension and Debarment Officials look for.
• Companies must have a viable process in place for employees.
• Commercial templates may not go to the depth required in government contracting.

Requirements Contractor Code of Business Ethics and Conduct ( FAR 52.203 13 )

Within 30 days after the contract is awarded unless extended by the Contracting Officer, the contractor must have a written code of business ethics and conduct.  The Disclosure Rule applies to all federal contractors with contracts valued at or expected to exceed $5,000,000 and where the performance period is 120 days or longer.  Unlike the FAR compliance and internal control requirements, under the Mandatory Disclosure Regulations, there are no exemptions for small businesses or for the acquisition of a commercial item.

FAR Mandatory Disclosure Compliance Program and Internal Control Systems

Under FAR 52.203-13, within 90 days, the contractor must also set up an ongoing business ethics awareness and compliance program as well as an internal control system; this requirement does not apply if the contractor has represented itself as a small business concern or if the contract is for the acquisition of a commercial item.  Pursuant to the internal control system, the system must, at least, provide for:

• Assignment at a ‘sufficiently high level’ to make sure effectiveness of a compliance program and internal control system
• Reasonable efforts not to include a principal who was engaged in conduct in conflict with the code of business ethics and conduct
• Periodic reviews of company practices and ethics and FAR compliance policies.
• Internal reporting mechanism for improper conduct
• Disciplinary action for improper conduct or failure to prevent
• Timely disclosure of federal criminal law or False Claims Act violations
• Full cooperation with any government agency responsible for audits, investigations, or corrective actions

FAR 52.203-13 MDR Compliance or Face Suspension and/or Debarment? 

Regardless of contract duration or value, all federal contractors may be suspended and/or debarred for knowing failure by a principal to timely disclose credible evidence of a federal criminal law or False Claims Act violation; this applies for 3 years after final payment.  

Under the  FAR Mandatory Disclosure Rule, contractors must also disclose credible evidence of significant overpayments. When the government suspects contractor violations, the contracting officer may refer the case to the respective agency.

This could be the Inspector General’s Office, Department of Justice or other relevant offices. Contractors must be aware that when there is credible evidence to support the agency’s position, the recommendation for suspension or debarment is highly likely. See differences between teaming agreements and joint ventures.

Have You Diligently Investigated to Make Sure that You have Credible Evidence?

The term “credible evidence” as it applies to the Mandatory Disclosure Rule is not spelled out in procurement regulations. It is definitely more that you have reason to believe.  You should conduct an internal audit or investigation to satisfy the requirement. This can be done through a consultant or government contracts attorney that understands the process and can show you how to be FAR compliant.

It is up to the contractor to substantiate its findings. Neither the government nor the OIG will give you set guidance. The underlying problem occurs when the government is on the offensive and targets your company for failure to disclose. Introducing the defense that you did not have credible evidence will then cause the government to then disprove your reasoning and then prove what it will not tell you in the beginning. Take the disclosure requirements seriously and get professionals to help.

Should You Conduct an Internal Investigation before Disclosing?

The Mandatory Disclosure Rule allows you to look into the evidence, conduct an internal investigation, and make sure the evidence is credible.  The rules do not set a timeline. However, acting promptly would be the standard.  You want to have counsel that understands the issues presented and what to look for. An example would be finding evidence that shows that your company was not complying with the limitations on subcontracting rule or that the small business was not complying with SBA procurement size regulations. The company would have an obligation to disclose. However, conducting an internal investigation before complying with the Mandatory Disclosure Rule will be allowed.

If you are unsure about what you need to show under FAR Mandatory Disclosure Rule requirements FAR 52.203-13, need help with internal investigations, or simply need mandatory disclosure consulting, please call a government contract FAR compliance lawyer at 1-866-601-5518 for a free consultation.