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As attorneys help a wider range of government contractors create compliance programs to meet tighter requirements rolled out late last year in an aggressive enforcement climate, they’re bracing their clients for even more stringent rules. Regulations that kicked in last December, known as the Contractor Code of Business Ethics and Conduct, generally require companies with government contracts worth more than $5 million to have written codes of business conduct and internal controls to ferret out wrongdoing. The rules, which are a broad change to the Federal Acquisition Regulation developed by several agencies, prompted midsize and smaller companies to craft new programs and larger companies to review existing ethics rules and internal reporting mechanisms. A second proposed rule issued last November, and still under review, has come under fire for its vague language requiring contractor reporting of potential wrongdoing, The Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council � which includes representatives from various executive-branch agencies appointed to recommend changes to the Federal Acquisition Regulation � issued the so-called Proposed Rule on Contractor Compliance and Integrity Reporting. Two new categories The new proposals would also apply government contracting rules to two new categories: government purchases of products primarily made for commercial use, and for work performed outside the United States. One key provision in the proposed new rule would require contractors to disclose information to the government whenever the company has “reasonable grounds” to believe an employee has violated a criminal law during the award process, or while working on a government contract or subcontract. Such changes would subject many commercial companies, whose sales to the U.S. government represent only a small portion of their revenue, to stringent oversight. Also, the overseas rules would force prime contractors to police foreign subcontractors, according to Rand Allen, chairman of the government contracts practice group at Wiley Rein in Washington. While most medium and larger companies view the new compliance regulations issued in December as a checklist for comparison with their own programs, smaller companies often must start from scratch, Allen said. “It’s going to have more of an effect on smaller companies who don’t have any infrastructure in place,” Allen said. “We’ve worked with smaller companies who are trying to do that,” he said. David Metzger, a McLean, Va., partner in the government contracts practice group at Washington’s Arnold & Porter, noted, “[w]e’ve done many, many small business compliance programs since last December.” Companies of all sizes are seeking help with the internal-controls component of the new rules, which mandate periodic internal or external auditing of a company’s reporting system for potential violations, said Mary Beth Bosco, a partner in the government contracts group at Washington’s Patton Boggs. “We certainly have a number of clients come to us and say, ‘will you look at our code of ethics and our system of internal controls in view of the new regulations and make suggestions to improve things,’ ” Bosco said. Some of the new ethics rules are not intuitive, so they need to be taught, particularly to private companies with employees who work side-by-side with government workers at a government site, said Mary Ann Gilleece, a partner in Holland & Knight’s Washington office. Such private employees have to be careful about gifts and entertainment, such as buying lunch for government employees who are effectively their co-workers for long stretches of time, Gilleece said. “It’s created demand to make sure everyone is trained, not just presidents of companies [but] people who are making the products, or billing, every once in a while you have to refresh [people's knowledge],” she said. While getting clients up to speed with new rules, lawyers are anticipating an even more unforgiving regulatory climate. The U.S. Department of Justice and other agencies have already been more aggressively investigating alleged wrongdoing since the new Congress took office in early 2007, Bosco said. “The agencies are very conscious of being watched by Congress,” Bosco said. “They want to be able to report they are enforcing the laws on the books.” The Justice Department referred questions about its enforcement efforts to recent congressional testimony by top officials. The acting chief of staff of the Justice Department’s Criminal Division, Barry M. Sabin, touted the agency’s work on contractor fraud in April 15 testimony to a congressional subcommittee. The testimony involved the pending House of Representatives bill known as Close the Contractor Fraud Loophole Act. Sabin said the agency’s National Fraud Procurement Task Force formed in October 2006 has brought criminal charges, civil cases, won convictions or inked settlements in more than 300 procurement fraud cases. “The Department of Justice has made the investigation and prosecution of procurement fraud a priority, including procurement fraud related to the wars, and rebuilding efforts, in Iraq and Afghanistan,” Sabin said. Government officials appear anxious to respond to congressional demands for more rules and oversight. Paul Dennett, administrator of the office of federal procurement policy in the Office of Management and Budget, said in his own April 15 testimony to the same congressional subcommittee that the new multiagency draft proposal issued this month should address Congress’ attempt to subject commercial and overseas contracts to the rules. Further assistance expected The broader ethics rules in the new proposal would require companies to seek even more help with compliance, according to lawyers. “Contractors are going to be unduly focused on avoiding being second-guessed on those kinds of things,” said Ron Schechter, a partner in the government contracts practice group in the Washington office of Arnold & Porter. The disclosure requirement of the proposed rules are also counterproductive because they hold the threat of disbarment or suspension for companies that fail to make voluntary disclosures, but don’t offer any special treatment for doing so, Metzger said. “That’s turning voluntary disclosure on its head,” he said. The rules are much broader than the Anti-Kickback Act of 1986, for example, which applies to prime contractors and subcontracts, Bosco said. Companies will need outside counsel to conduct more preliminary analysis and investigations of employee reports of improper conduct on hotlines, she said. Lawyers also question the practicality of some of the potential changes. Prime contractors doing work for the U.S. government on foreign soil should be subject to the same rules as those working in the United States, but it’s unreasonable to expect contractors to regulate subcontractors, Allen said. “It becomes really challenging, if not impossible, for a prime contractor to impose on local subcontractors a U.S. compliance regime,” Allen said.

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