Congress Getting Tougher On Government Contracting

Saturday, December 1, 2007 - 01:00

The 110th Congress may not have solved the Social Security crisis, found a consensus for dealing with illegal immigration, or remedied problems afflicting our health care system. But it has brought two pieces of legislation nearer to enactment that take aim at strengthening government contracting - both within the private contracting community and the federal procurement bureaucracy. Combined with the scrutiny that Congress is now focusing on Blackwater and other private security contractors, the legislation reflects an intensity of congressional oversight and legislative initiative in the area of government contracting unseen in recent years.

Cracking Down On Contractor Abuse

The risks associated with government contractor fraud are about to become more formidable. On October 9, 2007, the House of Representatives overwhelmingly passed legislation with broad ramifications for companies with contracts relating to U.S. military involvement in Iraq and Afghanistan. H.R. 400, "The War Profiteering Prevention Act of 2007" ("the Act"), creates new criminal offenses for fraudulent acts involving the provision of goods or services in connection with U.S. government operations overseas. Identical legislation was approved by the Senate Committee on the Judiciary in May 2007 and is a priority of the Senate Democratic leadership to bring to a floor vote this fall.

The Act comes in response to reports of contractor abuses concerning U.S. operations in Iraq and Afghanistan. As the Senate Committee on the Judiciary stated in its report on S. 119, the Senate bill,

The United States has devoted hundreds of billions of dollars to military, relief, and reconstruction activities in Iraq and Afghanistan, including more than $50 billion in relief and reconstruction activities. Private contractors have been used to a greater extent during these war-time activities than at any time in our history. The exigencies of war overseas, however, often make oversight of these contractors more difficult, and expenditures are often made with fewer audit and other controls than during normal government procurement. As a result, the provision of goods and services are more vulnerable to fraud and abuse. Inspectors General have opened hundreds of investigations into fraud, waste, and abuse involving, among other things, illegal kickbacks, bid-rigging, embezzlement, and fraudulent over-billing.

Both the Senate Committee on the Judiciary and the House Committee on the Judiciary indicated that "cost plus" and/or "no bid" contracts are of particular concern to the Congress.

Augmenting existing federal enforcement authority under the False Claims Act (18 U.S.C. 287), the legislation establishes a new criminal fraud offense in Title 18 of the United States Code aimed at contracting operations that occur during times of "war, military action, or relief or reconstruction activities." It makes it a crime, punishable by up to 20 years of imprisonment and a fine of up to $1 million, to engage in either of two acts: (1) executing or attempting to execute a scheme or artifice to defraud the United States or a provisional authority; or (2) "materially" overvaluing any good or service with the intent to defraud the United States or a provisional authority, such as the former Coalition Provisional Authority in Iraq.

Contractors may be found liable of materially overvaluing goods and services only if the government proves they had the specific intent to defraud. As the report of the House Committee on the Judiciary states, no contractor "may be prosecuted based on the contractor's merely negligent or innocently mistaken conduct" (emphasis added).

A separate offense would occur under the Act if a contractor (1) "falsifies, conceals, or covers up" a material fact "by any trick, scheme, or device"; (2) "makes any materially false, fictitious, or fraudulent statements or representations"; or (3) "makes or uses any materially false writing or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry." Thus, the false statement provisions under the Act are consistent with existing false statement provisions in 18 U.S.C 1001 and 18 U.S.C. 1035. In addition to a fine of up to $1 million, however, a contractor convicted of false statements under the pending legislation faces up to 10 years of imprisonment - double the penalty for false statements under 18 U.S.C. 1001.

The legislation is also noteworthy in two additional respects. First, it explicitly establishes extraterritorial jurisdiction for prosecution of any offenses under the proposed new statute. Thus, contractor activities occurring exclusively outside the United States would come within the government's enforcement jurisdiction. Correspondingly, the legislation creates venue for prosecution "in any district where any act in furtherance of the offense took place," or "in any district where any party to the contract or provider of services is located."

Second, the proposed new offense would constitute a "predicate crime" for prosecution of money laundering under 18 U.S.C. 1956(c)(7) or racketeering under 18 U.S.C. 1961(1). That means that an alleged fraud offense under the proposed legislation would be a statutory basis for charging violations of federal money laundering and racketeering laws. In addition, unlawful proceeds from contractor violations under the proposed law would be subject to criminal forfeiture under 18 U.S.C. 982(a)(2)(B).

In order to come within the new law, a fraud or material false statement must be in connection with a war or military action, or with relief or reconstruction activities. Both the House and Senate reports expressly provide, however, that liability may attach in circumstances either where war was declared, or where the executive branch was engaged in a military action with or without congressional authorization. Likewise, liability may attach for fraudulent conduct occurring in relief and reconstruction activities, regardless of whether U.S. military action was undertaken.

Reforming Government Contract Procedures

Congress is also devoting increased attention to government contracting institutions and procedures. On March 15, 2007 the House of Representatives passed the "Accountability in Contracting Act" (H.R. 1362) by a large margin. H.R. 1362 is aimed at curbing the government's use of non-competitive contracts and strengthening the federal acquisition workforce responsible for awarding and overseeing government contracts. Of particular concern to the House Committee on Oversight and Government Reform, which reported on the bill, are sole-source and cost-reimbursement contracts. According to the Committee's report, "[s]pending on sole-source and other non-competitive contracts has more than doubled over the last five years," and the government improperly has permitted these contracts to remain in force long after the urgency has ended that originally gave rise to their being awarded on a non-competitive basis. Similarly, the Committee found that cost-reimbursement contracts increased by 75 percent between 2000 and 2005. The problems attributable to these kinds of non-competitive contracts, the Committee determined, "have been compounded by an insufficient acquisition workforce to both properly award and adequately oversee federal contracts. "

H.R. 1362 calls for several measures to alleviate these problems. First, the bill amends the Federal Acquisition Regulations to restrict the contract period of sole-source and other non-competitive contracts "to the minimum contract period necessary to meet the urgent and compelling requirements of the work to be performed under the contract," and "to enter into another contract for the required goods or services through the use of competitive procedures." The contract period for such contracts may not exceed 240 days (i.e., approximately eight months) unless the head of agency extends the contract for "exceptional circumstances." Second, the bill requires agencies that spend more than $1 billion on federal contracts in a given fiscal year to develop and implement a plan to minimize the use of sole-source and cost-reimbursement contracts.

Third, the legislation contains provisions to facilitate greater oversight of government contractors. It requires agencies, within 14 days of awarding a contract on a non-competitive basis, to make the justification and approval documents regarding the award publicly available and to explain why the agency did not require full and open competition. Fourth, the bill requires agencies to report on a quarterly basis all contractor costs in excess of $1 million that are "unjustified, questioned, or unreasonable." Finally, the legislation requires agencies to devote at least an additional 1 percent of their procurement budget to contract oversight, planning and administration.

In related legislation, on November 7, 2007, the U.S. Senate passed the "Accountability in Government Contracting Act of 2007" (S. 680) by unanimous consent. In its report on the bill, the Senate Committee on Homeland Security and Governmental Affairs cited "[s]ystemic problems" in the acquisition process, including "shortages of trained acquisition personnel; the absence of effective competition and the lack of transparency in too many acquisitions; poor planning and oversight of contracts by agencies; and the frequent inability, or unwillingness, of agencies to hold contractors accountable for poor acquisitions outcomes."

Like H.R. 1362, S. 680 calls for measures to improve competition and accountability. It requires the issuance of regulations in each agency mandating competition on all multiple award task or delivery order contracts for the purchase of property and services - a requirement previously applicable only to the Department of Defense's acquisition of services. To promote transparency, the legislation requires that every task or delivery order in civilian and defense agencies "include a statement of work that clearly specifies the tasks to be performed or the property to be delivered under the order" - and that a post-award debriefing be available to all unsuccessful offerors. In another provision likely to place additional burdens on "an already stressed acquisition workforce," S. 680 creates a new right for an interested party to protest the award of a task or delivery order exceeding $5 million in value. To promote greater competition, the bill also prohibits the award of a single task or delivery order contract for services exceeding $100 million. And to establish greater capability to manage the enormous increase in government contracting, the bill requires the head of each federal agency to establish and operate acquisition and contracting training programs and to develop a cadre of interns to bolster the professional acquisition workforce.

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These bills collectively signal a changing landscape in congressional activism and oversight over the acquisition process and the accountability of government contractors, subjecting both the federal workforce and individual contractors to more rigorous standards. If enacted into law, they also promise additional challenges and opportunities for counsel.

David H. Laufman is a Partner at Kelley Drye & Warren LLP in the Washington, DC office, where his practice areas include federal enforcement investigations, government ethics and congressional oversight. He previously served as an Assistant U.S. Attorney in the Eastern District of Virginia and as Chief of Staff to Deputy Attorney General Larry Thompson.

Please email the author at dlaufman@kelleydrye.com with questions about this article.