Government Contracting Risks & Exposures

Transcription

1 Government Contracting Risks & Exposures

2 The material appearing in this presentation is for informational purposes only and is not legal or accounting advice. Communication of this information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant client relationship. Although these materials may have been prepared by professionals, they should not be used as a substitute for professional services. If legal, accounting, or other professional advice is required, the services of a professional should be sought.

3 Presenter Curtis Matthews CPA, CPE, CISA, CITP, CGMA Managing Partner Curtis leads Moss Adams Federal Contracting Risk and Compliance Group. He brings over 28 years of Federal and state program controls and audit experience. Curtis provided internal control and compliance services for PricewaterhouseCoopers LLP s Government clients, monitored Intel s Federal Programs Office compliance and prepared submissions and negotiated Federal contracts for a large aerospace and defense contractor. Curtis has served as a full charge Defense Contract Audit Agency (DCAA) auditor and has helped Federal contractors comply with Federal Acquisition Regulations (FAR), Federal and State Department Requirements, and Federal Cost Accounting Standards (CAS). Curtis has performed over 100 Government compliance audits and has negotiated over 200 Federal contracts. He has helped companies implement Federal contracting compliance programs and successfully respond to and address DCAA audits. Curtis has helped his clients improve Government compliance controls in a wide variety of contracting environments, including firm fixed price and cost reimbursable Federal contracts.

4 Presenter James Bradshaw Special Counsel James practice at Ball Janik LLP focuses on Government contracts and business transactions, both domestic and international. He supports companies in pursuing and performing contracts with military and civilian agencies of governments throughout the world. He helps clients understand the complexities of U.S. Government procurement regulations and implement solutions designed to facilitate compliance with such regulations. He represents companies operating at both the prime contract and subcontract level, as well as those selling to governments directly or through an intermediary. Mr. Bradshaw has experience assisting companies with a broad range of commercial business transactions, including those relating to sales, supply, service, development, manufacturing and distribution. He supports clients through each phase of the undertaking. Mr. Bradshaw has significant hands on experience facilitating transactions and establishing sales channels in approximately 100 countries throughout the world. He has a particular experience in helping companies vet, engage and disengage foreign agents, consultants, sales representatives, dealers and distributors.

5 Discussion Topics for Today Assortment of Restrictions and Obligations o Multiple acts and public laws o Federal Acquisition Regulation (FAR) requirements o Systems compliance requirements o Specific contract clauses Severe Penalties o Imprisonment o Civil and criminal fines o Administrative penalties o Loss of contract or opportunity Awareness, Education, Training Business Ethics Program

6 Government Contracting Risk Areas Severe Penalties for Personal and Company Noncompliance o False Claims Act o False Statements Act o Reckless ignorance o Truth in Negotiations Act (TINA) o Breach of contract Loss of Government Funding o Suspension and debarment from government business o Due to noncompliance with Federal Acquisition Regulations (FAR), Defense Federal Acquisition Regulation Supplement (DFARS), Federal Cost Accounting Standards (CAS); or failure to perform (breach of contract)

7 Government Contracting Risk Areas (cont.) Severe Penalties for Government Noncompliance o Submitting Claims (18 USC Section 287) Company fines up to $1 million per occurrence Defense Department specific Individual risk of up to ten years in Federal prison o False Claims Act (31 USC Sections 3729 to 3733) and False Statements Act (18 USC Section 1001) Both acts impose individual fines of up to $250,000 per occurrence for individuals and $500,000 for organizations with imprisonment exposures o Reckless Ignorance is also available to the Government per 31 USC Section o Gross negligence can constitute constructive fraud

8 Government Contracting Risk Areas (cont.) Severe Penalties for Government Noncompliance (cont.) o Truth in Negotiations Act (TINA) Failure to provide current, accurate and complete cost and pricing information at the time of agreement on price (FAR and FAR ) TINA is applicable to negotiated research and development agreements TINA violations or defective pricing result in reduction in contract price based on the impact of the information not disclosed (regardless of actual incurred contract cost) Fines and interest charges may be applied under TINA Civil and/or criminal penalties can also be applied under the False Claims Act, exposing the individual and the company (as discussed in previous slide)

9 Government Contracting Risk Areas (cont.) Severe Penalties for Government Noncompliance (cont.) o Breach of Contract United States law will apply to resolve any claim of breach of contract (FAR Applicable Law for Breach of Contract Claim) Termination for cause is available to the Government in these instances this can be costly

10 Government Contracting Risk Areas (cont.) Examples there are many. Here are a few: Northrop Grumman s Electronic Sensors Systems Division agreed to pay $5.3 million to settle alleged violations of the Truth in Negotiations Act Raytheon paid $2.7 million to settle allegations that the company charged the Government for costs incurred in marketing products to foreign governments Boeing paid $1.85 million for alleged defective pricing NetApp, Inc. (formerly Network Appliance) has agreed to pay $128 million to settle a lawsuit alleging that it violated the False Claims Act A Tools & Metals Inc. (TMI) former president pleaded guilty and was sentenced to seven years in prison in connection with his role in a pricing fraud Adverse publicity exposure

11 Civil False Claims Prohibits knowing submission of false records, invoices or claims for payment Reckless conduct or deliberate ignorance Intent to defraud not required Applies to subcontractors Lawsuit by Government or whistleblower

12 Civil False Claims (cont.) Penalties: o Up to three times the amount of the false claim o Plus $5,500 11,000 per claim Actions typically focus on: o Mischarging o Product substitutions o Eligibility/compliance with special Government contracting program requirements o Defective pricing

13 Civil False Claims (cont.) Qui tam lawsuit Government may intervene and take over prosecution Whistleblower may recover: o 15 25% if Government intervenes o 25 30% if no intervention o Legal fees and expenses Whistleblowers protected from retaliation NetApp Inc. o Failed to comply with the General Services Administration s (GSA) most favored customer pricing o Whistleblower contract administrator o $128M settlement, with $19.2M to whistleblower

14 Criminal False Claims Criminal versus civil differences: o Level of intent o Burden of proof Penalties: o Up to five years imprisonment o $250K for individuals o $500K for companies

15 Criminal False Claims (cont.) Bechdon Company o False claims inflated billing o Owner s sentence included: 18 months imprisonment 1 year of home detention 3 years of supervised release $100,000 fine $247,631 restitution o Company Non Prosecution Agreement $1M penalty Sell business operations President resignation

16 False Statements Prohibits lying to Government Statements o Certifications o Invoices o Timecards o Price quotes Indirect statements to Government Must be material

17 Mail and Wire Fraud Prohibits using mail/wires for scheme to defraud o Telephone o Internet Add on charge Penalties: o Up to 20 years imprisonment o Criminal fines

18 Bribery and Illegal Gratuities Prohibits: o Providing any thing of value to a Federal employee o For or because of an official act o Or with intent to influence Things of value include: o Gifts o Entertainment o Meals

19 Bribery and Illegal Gratuities (cont.) Requires showing: o Corrupt intent o Quid pro quo Bribe need not actually be paid Penalties: o Whichever is higher Three times the amount of the bribe, or $250,000 individuals/$500,000 organizations o Up to 15 years imprisonment

20 Bribery and Illegal Gratuities (cont.) For or because of an official act Reward for performing duty Prohibits gifts of any size Penalties: o $250K individuals o $500K organizations o Up to two years imprisonment o Contract termination for default

21 Permissible Gifts U.S. Office of Government Ethics (OGE) o Gifts that Government employees can accept Modest items of food and refreshments o Offered other than as part of a meal o Soft drinks, coffee, donuts Greeting cards and items with little intrinsic value o Intended solely for presentation o Plaques, certificates, trophies $20 max value per source per occasion $50 total value per source per calendar year

22 Anti-Kickback Act Prohibits: o Giving or receiving kickbacks to obtain or reward favorable treatment in connection with Federal contracts/subcontracts Kickbacks: o Money, fees, commissions, credits Report suspected violations to Government Flow down FAR clause for subcontracts > $100K

23 Anti-Kickback Act (cont.) Tamimi Global Company Ltd. o Contracts to run catering facilities o Kickbacks paid to subcontract manager o Illegal gratuities paid to Army sergeant o $13M settlement o Compliance program New management team and ethics/compliance team Strengthen code of business conduct Modernize procedures for finance/accounting Institute compliance hotline Retain consultant to evaluate/monitor compliance program

24 Improper Access to Government Information Prevents unfair advantage due to unequal access to information Prohibits disclosing or obtaining o Contractor bid or proposal information Info submitted with a bid or proposal Cost or pricing data, labor rates, proprietary information o Source selection information Info agency uses in evaluating bids or proposals Proposal prices, technical evaluations, rankings of bids Penalties o $50K individuals, $500K organizations o Administrative penalties, cancel procurement, rescind contract o Criminal liability for soliciting info in exchange for something of value

25 Organizational Conflict of Interest Disqualifies contractor from related work Typically occurs in contracts involving: o Management support or professional services o Contractor assistance in technical evaluations o Systems engineering work Contract Officer (CO) identifies/mitigates conflicts before award FAR provides examples o Contractor who prepares specification for nondevelopmental item (NDI) may not be awarded contract to supply item during initial production

26 Employment Discussion Restrictions Government official participating personally and substantially Procurement > $100K Bidder contact about employment Official must: o Report contact to agency o Reject offer or disqualify himself Penalties: o Cancellation of procurement o Contract rescission o Suspension and debarment o $50K individuals, $500K organizations, 1 2 times compensation

27 Post-Employment Restrictions Former Government employee o Restricted from representing private employer o In connection with matters previously under responsibility Vary in scope and duration o One year, two years or lifetime o Depends on employee s position and responsibilities Termination of a contract, criminal prosecution

28 Suspension and Debarment Contractor prohibited from receiving prime or subcontract awards Debarment o Exclusion for specified time o Generally less than three years Suspension o Exclusion pending completion of investigation o Open ended period Grounds o Procurement related offense o Violation of antitrust laws o Serious breach of contract or subcontract Focus on present responsibility

29 Mitigating Factors Standards of conduct and internal control systems o In place at time of activity o Adopted prior to Government investigation Prompt notice to Government of activity Full investigation disclosed to Government Full cooperation with Government Pay criminal, civil and administrative liability o Including Government s investigative or administrative costs Implement remedial measures Institute new review and control procedures and ethics training programs

30 Developing a Compliance Program Benefits of a compliance program: o Help avoid violations o Create awareness o Mitigate severity of penalties o Contractual requirement Components to include: o Code of ethics o Corporate policies and procedures o Compliance officer o Company hotline o Audits and investigations o Education and training

31 Developing a Compliance Program (cont.) Code of Conduct and Mandatory Disclosure , Contractor Code of Business Ethics and Conduct Contracts >$5M + >120 days Contractor must: o Have written code of conduct o Provide copies to employees o Perform due diligence to prevent/detect criminal conduct o Promote culture of ethical conduct Timely disclosure to Government: o Violation of Federal criminal law regarding fraud o Violation of the civil False Claims Act o Substantial overpayments

32 Developing a Compliance Program (cont.) Having necessary systems in place is key to preventing penalties and continuing to work for the Government DFARS Business System Rules (May 2011) o Only applies to CAS covered contractors o Only applies if the following clause(s) are included in the contract: , Cost Estimating System Requirements , Earned Value Management System , Material Management and Accounting System , Accounting System Administration , Contractor Purchasing System Administration , Contractor Property Management System Administration

33 Developing a Compliance Program (cont.) Policies and Procedures It is critical that organizations have policies and procedures that address: o Compliance with Government contract special terms o Systems requirements for Government contracting o Controls over cost and pricing data provided (TINA) o Claims preparation (False Claims Act)

34 Wrap Up You face several Government contracting risks. Your compliance with Government contracting rules provides opportunity to succeed and sleep at night. We encourage you to assess the exposures you face and build the process and controls needed to succeed.

35 Thank you for joining us today! Curtis Matthews (503) James Bradshaw (503) The material appearing in this presentation is for informational purposes only and is not legal or accounting advice. Communication of this information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant client relationship. Although these materials may have been prepared by professionals, they should not be used as a substitute for professional services. If legal, accounting, or other professional advice is required, the services of a professional should be sought.