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Recently Adopted Federal Regulation Requires Contractors To Disclose Their Own Fraud

Date Published
Dec 17, 2008

An amendment to the government’s Federal Acquisition Regulations (FAR) that went into effect last week mandates that all government contractors are required to disclose to the government any “credible evidence” that they might have violated the False Claims Act. The FAR is, in essence, a set of rules that governs all government contracts, save for those involving a few select agencies (the Postal Service, for example). The Contractor Code of Business Ethics and Conduct, which became part of the FAR on December 12, 2008, is the new set of guidelines that calls for False Claims Act disclosures. The citation for the new code of ethics is 73 Fed. Reg. 67064.

While the FAR previously only called for voluntary disclosure of violations of certain contracts, the new code of ethics specifies that all contractors are required to inform the Office of the Inspector General of the relevant agency whenever they have “credible evidence that a principal, employee, agent, or subcontractor” has violated either the False Claims Act or any “criminal law involving fraud, conflict of interest, bribery, or gratuity violations.” The new code of ethics applies not only to violations occurring after December 12, but also to any earlier, unreported infractions.

The new code also calls for any contractor to establish within 90 days of the award of a contract a “business ethics awareness and compliance program and internal control system.” The minimum requirements of the internal control system call for “timely disclosure” of any violation of the False Claims Act or certain other laws, and “the disclosure requirement for an individual contract continues until at least 3 years after final payment on the contract.” Certain small business contracts and contracts solely for the purchase of commercial goods are exempt from this section of the code.

The implementation of an ethics awareness program is especially important, as it will hopefully increase awareness of the False Claims Act among employees of all government contractors, and thus encourage those with knowledge of fraud to come forward. While the requirement that contractors voluntarily disclose False Claims Act violations may result in some recoveries by the government, one has to at least wonder why a company that intentionally defrauded the government out of large sums of money would suddenly turn itself in just because of this new regulation. Although the new regulation is not a bad idea, the bravery and patriotism of individual whistleblowers will likely continue to be the driving force behind the disclosure of fraud, and the recovery of taxpayer money.

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