Regulating Ethics: The U.S. Approach to Procurement Integrity & Anti-Corruption ABA Section of International Law & Practice Brussels, Belgium September 24, 2008 Alan W.H. Gourley © 2008 Crowell & Moring LLP

2 INTRODUCTION: A Complicated Rulebook  Broad principle: promote transparency and fairness in public procurements  U.S. approach: rely on highly regulated system backed by criminal law enforcement –The Procurement Integrity Act and Off- Limits Information –Employment Discussions and Hiring Government Employees –Prohibitions on Gifts and Entertainment –The Anti-Kickback Act –Conflicts of Interest

3 © 2008 Crowell & Moring LLP Off-Limits Competitor and Government Source Selection Information  41 U.S.C. § 423(a) – Disclosures of Procurement Information –Both active and former government officials, and –Those who are acting or have acted on the government’s behalf  May not disclose –Contractor information, or Source selection information  For a period of 3 years from end of assignment  41 U.S.C. §423(b) – Obtaining Procurement Information –No person may knowingly obtain  Contractor info, or  Source selection information –Prior to award of the contract –Except as authorized by law

4 © 2008 Crowell & Moring LLP Off-Limits Competitor and Government Source Selection Information  Source Selection Info that is “off-limits” includes: –Bid prices and proposed costs –Source selection plans –Technical evaluation plans –Cost or price evaluations –Competitive range determinations or rankings –SSA/SSB or other evaluation reports –Other info marked “source selection information”  Regulations favor marking and consultation if there is any doubt. See FAR (c)

5 © 2008 Crowell & Moring LLP Off-Limits Competitor and Government Source Selection Information  Contractor information includes: –Cost or pricing data –Proprietary data –Indirect costs and direct labor rates –Other information marked by the contractor  By regulation, CO must give contractor opportunity to object before removing any such markings. See FAR (d)

6 © 2008 Crowell & Moring LLP Competition Info – Remedies  Award subject to bid protest –But must have reported the violation within 14 days of knowledge  Criminal penalties (5 years imprisonment)  Civil Fines –$50,000 individuals –$500,000 for organizations  Contract rescission with return of all funds  Debarment  Private causes of action

7 © 2008 Crowell & Moring LLP Case Study – EKV Program  Missile defense program known as exoatmospheric kill vehicle  Boeing was both Lead System Integrator and competitor to Raytheon for EKV contract –Boeing EKV team finds copy of Raytheon SW Test Plan after Army meeting –2 weeks later disclosed to Army  After BDMO had spent $400 million on preserving competition, Boeing EKV team withdrew

8 © 2008 Crowell & Moring LLP Case Study – Private Causes of Action  Lockheed Martin Corp. v. The Boeing Company, M.D. Fla. No. 6:03-cv-0796 –Boeing hired former LMC engineer, Branch, involved in Evolved Expendable Launch Vehicle –Boeing investigation reveals Branch brough some LMC EELV documents –Discovery in litigation reveals up to 37,000+ pages of LMC material –Criminal cases; civil case ultimately settled

9 © 2008 Crowell & Moring LLP Employment Discussions  41 U.S.C. § 423(c) –Applies to agency officials “participating personally and substantially” in procurement above simplified acquisition threshold –Must report offers of employment and either  Reject, or  Disqualify herself from further participation –Contractor liable if engages in employment discussions with an official who has not complied

10 © 2008 Crowell & Moring LLP Post-Employment Restrictions  18 U.S.C. § 207 –Permanent Ban – Personal & Substantial Participation –2 Year Ban – Pending w/in last year of employment  41 U.S.C. § 423(d) –Also bars compensation for a period of one year for numerous former government officials participating in evaluation or making decisions in awarding contracts > $10 million –Applicable to contractors, their employees and their consultants. –Exception for employment by division or affiliate producing a different product.

11 © 2008 Crowell & Moring LLP Case Study – Druyun  Boeing hired former top Air Force procurement official – became a VP in the Space Group  Later revealed that discussions had commenced prior to disqualification from Boeing procurements –Boeing fired Ms. Druyun and Mr. Sears, CFO –Ms. Druyun sentenced to 9 mos. prison  $5,000 fine –Mr. Sears sentenced to 4 mos. prison  $250,000 fine –Boeing $615 Million settlement

12 © 2008 Crowell & Moring LLP Providing Gifts, Gratuities, and Entertainment to Government Employees  Criminal bribery and gratuities (18 U.S.C. § 201)  Office of Government Ethics Standards of Conduct Regulation “bright line” rules for Executive Branch employees  FAR Gratuities clause – contract cancellation  Debarment and suspension risk  House and Senate Gift Rules

13 © 2008 Crowell & Moring LLP Gifts to Prime and Subcontractor Employees  Restrictions on entertainment and gift-giving are governed by the Anti-Kickback Act  Kickbacks defined as anything of value given to obtain or reward favorable treatment  Improper motive can be inferred from the circumstances – no “bright line” rule

14 © 2008 Crowell & Moring LLP Organizational Conflicts of Interest (“OCIs”)  The issue is more acute now: –consolidation of the defense industry (OCI principles generally treat the entire corporate family as a single entity) –reliance on systems integrators  FAR Subpart 9.5 –To prevent conflicts and unfair competitive advantage –3 types of OCIs:  Unequal access to information  Biased ground rules  Impaired objectivity

15 © 2008 Crowell & Moring LLP OCI: Unequal Access to Information  Generally by reason of performance of another Government contract –Proprietary  i.e., a competitor’s proprietary information –“Nonpublic” information  Risk Areas –Performing advisory and assistance services for the Government (FAR (b)) –Marketing consultants (FAR (c))

16 © 2008 Crowell & Moring LLP OCI: Biased Ground Rules  FAR : –“a [contractor], as part of its performance of a government contract, has in some sense set the ground rules for another government contract by, for example, writing the statement of work or the specifications.” Aetna Gov’t Health Plans., Inc.; Foundation Health Fed. Servs., Inc., B , et al., July 27, 1995, 95-2 CPD ¶ 129 at 13. –E.g., contractor furnishes complete specification for non- developmental item, contractor prepares or assist in preparing a work statement to be used in competitively acquiring a system or services, or provides material leading directly, predictably, and without delay to such a work statement

17 © 2008 Crowell & Moring LLP OCI: Impaired Objectivity  A contractor is in the position of evaluating its own performance or products, or the performance or products of a competitor (FAR )  Concern: contractor’s ability to “render impartial advice to the government will be undermined, or impaired, by its relationship to the product or services being evaluated...” Overlook Sy. Techs., Inc., B et al., Nov. 28, 2006, 2006 CPD ¶ 185 at 10.

18 © 2008 Crowell & Moring LLP OCI Red Flag Activities  OCIs can and do arise in many types of contracts. The FAR recognizes greater risks in: –Management support services; –Consultant or other professional services –Assistance in  Specification/work statement preparation  Technical evaluation –Systems engineering and technical direction when contractor does not have overall responsibility for development or production. FAR 9.502(b).

19 © 2008 Crowell & Moring LLP What is not an OCI?  No judgment involved  Contractor’s knowledge the result of incumbency  Contractor’s previously engaged to perform development and design work. FAR (a)(3); (b)(1)(ii).

20 © 2008 Crowell & Moring LLP OCI: Mitigation  Where OCI potential exists, CO obligated to attempt to devise a mitigation plan. FAR and  The mitigation plan must be tailored to specific facts and address the type of OCI by removing the risk to the Government –Some OCIs easier to mitigate than others (e.g., firewalls may be sufficient for unequal access to information) –Some OCIs cannot be mitigated

21 © 2008 Crowell & Moring LLP Contractor Compliance Program and Integrity Reporting  Rules Constantly Evolving!  Final Rule on Contractor Code of Business Ethics and Conduct (72 Fed. Reg , Nov. 23, 2007) –Rule requires basic codes of ethics and training and internal controls to detect and prevent improper conduct for companies doing business with the Government, as well as posting of agency OIG hotline posters at contractor worksite –Applies if contract expected to exceed $5 million and performance period greater than 120 days –Exempts commercial contracts –Exempts contracts performed entirely outside the United States

22 © 2008 Crowell & Moring LLP Contractor Compliance Program and Integrity Reporting: 2nd Proposed Rule  73 Fed. Reg , May 16, 2008, Considering changes to: –Address concerns regarding the proposed exemption for contracts performed entirely outside of the United States; –Address concerns regarding the proposed exemption for acquisition of commercial items; –Address DOJ proposal to add requirement for contractors to report violations of False Claims Act and to make knowing failure to timely report an additional cause for debarment or suspension.

23 © 2008 Crowell & Moring LLP Government Enforcement Tools  How does the U.S. Government enforce the complicated procurement integrity regime? –Audits and investigations  OIG, FBI, DOJ –Federal statutes: false claims, false statements, etc. –Monetary claims, fines, and penalties  Jail time –Past performance ratings –Non-responsibility determinations –Exclusion from the competition –Suspension and debarment –Other: competitor hotline calls and bid protests

24 © 2008 Crowell & Moring LLP Contact Information Alan W.H. Gourley +44 (0)