Identifying and Avoiding Suspension and Debarment Pitfalls
Wednesday, October 22, 2014 - October 2014 Newsletter: Executive-in-Residence News: Butzel Long: "Identifying and Avoiding Suspension and Debarment Pitfalls"
Government contractors who come under investigation for any reason need to know about suspension and debarment. Investigations that result in criminal prosecution or civil enforcement proceedings, or that otherwise unearth adverse information about a company's business ethics, can lead to the company being excluded from government contracting. This article discusses the types of matters that can lead to suspension and debarment, the potential consequences, and administrative agreements that can help avoid or terminate a suspension or debarment.
The Federal Regulatory Framework
Companies that contract with the U.S. government must comply with Federal Acquisition Regulations (the "FAR"). The regulations prohibit, among other things, most gifts and gratuities, kickbacks to subcontractors, and actions that restrain competition. Ultimately, government contractors must be able to show they are "responsible" from the time they bid on a government contract and throughout the contract term. 48 C.F.R. pt. 9.100. The regulations list several factors that bear on a contractor's responsibility, including:
- Adequate financial resources to perform under the contract
- Ability to meet performance deadlines
- A record of integrity and business ethics
- Adequate organization, experience, and accounting and operational controls
48 C.F.R. pt. 9.104.
Federal agencies have generous discretion to suspend, debar, or declare ineligible any potential or existing contractor that does not satisfy the government's standards. 48 C.F.R. pt. 9.4. A variety of criminal convictions or civil judgments can trigger debarment proceedings. Fraud, bid-rigging, embezzlement, theft, forgery, bribery, destruction of records, false statements, and federal tax offenses can all justify debarment. 48 C.F.R. pt. 9.406-2. More broadly, "any other offense indicating a lack of business integrity or business honesty that serious or directly affects the present responsibility of a government contractor" can also support debarment. Id.
Suspension and debarment proceedings provide limited opportunities for contractors to oppose the debarment; the "proceedings" fall far short of litigation in court or arbitration. Contractors can request meetings with debarment officials to discuss a proposed suspension or debarment, and the opportunity to make written submissions, and would be well-advised to do so.
The Impact of Suspension, Debarment, or Exclusion
First, it is worth noting that a contractor's affiliation with a suspended or debarred contractor can justify suspension. 48 C.F.R. pt. 9.406-1(c), pt. 9.407-1(c). Indeed, when a significant international company's corporate parent was indicted for government contracting fraud and suspended from government contracting, over 100 affiliates that arguably had no involvement in the alleged fraud were also suspended. That action was upheld by a federal court of appeals last year. Agility Defense & Gov't Services v. U.S. Dep't of Def., 739 F.3d 586 (11th Cir. 2013). The breadth of the sanction imposed on Agility is troubling and illustrates the enormous potential collateral consequences of a suspension or debarment.
Second, contractors who are excluded for any reason are listed on the GSA's System for Award Management (SAM) Exclusions. One can expect suspension by one agency to quickly become a government-wide bar. The system contains robust information about the suspended or debarred person or company. Contractors who are debarred, suspended, or proposed for debarment cannot receive or solicit award of government contracts, absent an agency determination that there is a compelling reason to do so. 48 C.F.R. pt. 9.405. In a compliance-oriented world, being listed on the SAM website often has additional impact; many compliance-oriented companies routinely check the SAM system as part of their normal business ethics regime and may have serious reservations about doing business with excluded companies.
Administrative Agreements - A Potential Solution
Some federal agencies will consider lifting suspensions or debarments for companies that are willing to enter into an administrative agreement with the agency. One notable example is the agreement between BP and the United States Environmental Protection Agency ("EPA") that terminated BP's suspension and statutory disqualifications from government contracting. In addition, the United States Air Force has some history of approving administrative agreements in selected cases. Because such agreements necessarily concern each company's individual circumstances, they must be crafted through careful negotiation. Most administrative agreements tend to include the following types of provisions:
- Compliance with any requirements from probation or other enforcement proceedings
- Enhancements to corporate ethics and compliance programs
- Enhancements to written codes of ethics and conduct
- Creation of new senior management positions, board of director committees, or direct reporting mechanisms dedicated to ethics and compliance
- Regular risk-based ethics and compliance program audits, often by third-parties, often with a requirement that the corporation embrace and implement third-party recommendations
- Regular certifications regarding distribution of codes of conduct
- Regular certifications of ethics and compliance training, which often include training and incentives for senior operational managers
- Establishment or enhancement of reporting mechanisms for potential ethics and compliance challenges, including at least one anonymous reporting avenue
- Centralization of information regarding potential conflicts of interest and tracking of gifts and gratuities
- Requirements to notify the government entity about ethics and compliance challenges the company encounters
- Notification requirements for third-party vendors regarding standards of ethics and compliance
- In some cases, particularly if they involve large corporations or relatively in-depth problems, the government may require the appointment of an independent monitor, separate and apart from the ethics and compliance audit function, to ensure that changes to ethics and compliance programs are implemented and enforced. Such requirements may be accompanied by parallel monitor requirements in resolving criminal or enforcement investigations.
Administrative agreements may seem oppressive, but they can avoid a severely damaging bar from government contracting. In this context, the cost and effort involved in implementing an administrative agreement must be considered a necessary cost of preserving key business.
Butzel Long has substantial experience in debarment and suspension matters and has obtained outstanding results for clients facing these issues.