September 27, 2007

On July 9, 2007, the National Procurement Fraud Task Force (the Task Force) Legislation Committee transmitted a white paper entitled “Procurement and Grant Fraud: Legislative and Regulatory Reform Proposals” to the United States Department of Justice addressing proposed legislative and regulatory reforms. The task force, created on October 10, 2006, is a partnership of federal agencies that investigate and prosecute illegal activities concerning government contracting and grant activities. If enacted, the proposed reforms would have far-reaching implications on the federal government’s ability to detect, investigate and prosecute procurement or grant fraud.  The white paper provides insights into the possible future of procurement and grant fraud enforcement. To read the white paper in its entirety, please click here.

Task Force Proposed Legislative and Regulatory Reforms

The white paper, while not containing specific legislative language, sets forth three main areas of federal legislation and regulation to aid the federal government in detecting and prosecuting procurement and grant fraud: (1) improving ethics and internal controls at vendors with over $5 million in government sales and companies that receive federal assistance; (2) improving the government’s ability to prosecute and adjudicate procurement and grant fraud by amending the Federal Sentencing Guidelines and enhancing the subpoena authority and investigatory powers of the Offices of Inspector General; and (3) improving the government’s ability to prevent and detect procurement fraud by requiring the reporting of government overpayments to vendors with over $5 million in government sales, extending criminal conflicts of interest provisions, enhancing the General Services Administration’s audit powers, and establishing a national procurement fraud database to be used before authorizing grants or contract action that use federal funds.

Proposed Ethics And Internal Control Reforms

In order to ensure compliance with and to add an efficient oversight mechanism for government contracting requirements and federal assistance programs, the Task Force Legislative Committee proposed two legislative proposals that would require government contractors and recipients of federal financial assistance to have an internal compliance program in place that would facilitate the timely detection and disclosure of improper conduct and measures to ensure that corrective action is taken.

The proposal lists six minimum requirements for the compliance programs, including an internal reporting mechanism for employees to report suspicious activity, a mandate to timely report to appropriate government officials any suspected violations, and full cooperation with any government agencies responsible for investigations or corrective actions. The white paper does not define the term “full cooperation.”

Responsibility for determining the existence and sufficiency of a vendor’s compliance program officer rests with the governments grants/program officer. Recipients who fail to establish a sufficient compliance program or knowingly fail to report suspected improper conduct in connection with an award may be subject to grant suspension or termination in addition to other remedies available to the government.

These proposed reforms are similar to a proposed Federal Acquisition Regulation rule: 32 Federal Register 7588, 2/16/07 (FAR Case 2006-007).

Proposed Prosecution And Adjudication Reforms

To improve the prosecution and adjudication of procurement and grant fraud cases, the Task Force Legislative Committee has proposed four reforms:

1. Amend the Federal Sentencing Guidelines to better define economic loss in procurement and grant fraud cases;
2. Expand Office of Inspector General subpoena authority to include the ability to compel interviews and to clarify that OIG can subpoena tangible things and electronic evidence;
3. Allow OIG to detail counsel to the Department of Justice to assist in prosecuting certain procurement and grant fraud cases; and
4. Extend the Program Fraud Civil Remedies Act to allow all OIG offices the ability to utilize provisions under the act.

Proposed Prevention And Detection Of Procurement Fraud Reforms

In order to improve the ability to prevent and detect procurement fraud, The Task Force Legislative Committee proposed five reforms:

1. Changes to the Federal Acquisition Regulations to require contractors to notify the relevant agency of any overpayments;
2. Expanding criminal conflicts of interest law (18 U.S.C. § 208) to include contractors who perform key acquisition functions in the federal government;
3. Reinstating the ability of the General Services Administration to audit pricing information submitted to GSA contracting officers during negotiation in GSA and VA Multiple Award Schedule contracts;
4. Establishing a National Procurement Fraud Database; and
5. Establishing background check requirements for federal contractors.

Call to Action

The proposed legislative and regulatory reforms, if enacted into law in full, partial, or adapted form, will broaden the federal government’s ability to detect, investigate, and prosecute procurement or grant fraud, while imposing on government contractors and recipients of federal grants specific compliance and ethical obligations. If you or your company wishes to speak with someone at Ballard Spahr about procurement or grant fraud detection and prevention or your company’s compliance department’s procedures for handling government contracts or the receipt and use of federal grants, please contact Ronald A. Sarachan, partner in charge, White Collar Litigation Group, at 215-864-8333.