New Rule Requiring Ethics Code and Related Internal Controls; Proposed Rule to Require Reporting Violations of Criminal Law in Contracting

Federal contractors receiving awards worth more than $5 million and involving work in excess of 120 days will be required to put in place a written “code of business ethics and conduct” under a new government-wide rule taking effect Dec. 24. The new rule will also require covered contractors to display fraud hotline posters provided by the office of inspector general of the contracting agency but an exemption from this rule will apply to contractors who have an “established mechanism by which employees may report suspected instances of improper conduct.” The covered contractors will have 30 days from contract award to prepare a code of business ethics and 90 days to establish an ethics awareness and compliance program and internal control system though a contractor can request an extension and the CO should grant it (Fed. Reg. 63084).

The rule states a contractor’s “internal control system shall facilitate” timely discovery of improper conduct in connection with government contracts and ensure corrective measures are promptly instituted and carried out. For example, the internal control system should provide for (1) periodic review of company business practices, procedures, policies and internal controls for compliance with the company’s code of business ethics and “special requirements” of government contracting (2) an internal reporting mechanism such as a hotline (3) internal or external compliance audits and (4) disciplinary action for improper conduct. The requirements will flow down from the prime to subcontractors.   Small businesses are exempt from requirements to have a formal training program or internal control system and further the mandatory aspects of the rule do not apply to commercial items, either at the prime or subcontract level (Fed. Reg. 65873).

In a separate action, a proposed government –wide rule issued Nov 14 would require federal contractors to report to their contracting officers and agency inspectors general if they discover violations of federal criminal law in connection with the award or performance of federal contracts or subcontracts valued at $5 million or more. Contractors would be suspended or debarred from federal contracting if they fail to do so. This latest proposal is issued at the request of the Justice Department as a means to promote business ethics and involve contractors in combating improper conduct. According to the DOJ, the new requirement for mandatory disclosure is necessary because “few companies have responded” to their invitation to the Defense Department to report or voluntarily disclose suspected instances of violations of federal criminal law related to contracting or subcontracting (Fed. Reg. 64091).

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