FEI CGB recommended that the proposed rule be withdrawn. Among the reasons for this recommendation noted in the comment letter:

• “the proposed rule would essentially require contractors and subcontractors to become fraud detection and reporting entities … [by] require[ing] contractors and subcontractors to exercise due diligence “to prevent and detect criminal conduct.”
• This requirement is a dramatic shift in responsibility for contractors.
• The terms of the proposed rule and the statements by DOJ demonstrate DOJ’s position that a contractor’s current system of internal controls is not good enough – contractors must do more than their current activities, to “prevent and detect criminal conduct.”
• The proposed rule does not articulate specifically what more is required, but states only that an internal control system must “at a minimum” provide for “monitoring and auditing to detect criminal conduct.” How will contractors and subcontractors know whether their internal controls are sufficient under the proposed rule? Must contractors and subcontractors become experts in, for example, forensic accounting and private investigation? What government agency will provide the standards so contractors and subcontractors have a reasonable basis for determining their compliance with these new requirements?”
• [under the proposed rule] … “contractors and subcontractors … must also notify the agency IG [inspector general] whenever they have “reasonable grounds to believe a principal, employee, agent, or subcontractor of the contractor has committed a violation of Federal criminal law in connection with the award or performance of this contract or subcontract.”
• This standard – often referred to as “probable cause” in criminal law – is the same as that used for grand juries to render indictments.
• Moreover, the requirement that prime contractors exercise this level of criminal detection on subcontractors, and subcontractors on lower-tier subcontractors, would create significant legal and practical issues. How will higher-tier contractors ascertain compliance with the proposed regulation by lower-tier subcontractors? What additional oversight mechanisms must they embed in subcontracts?”
• “The proposed rule would require contractors and subcontractors to exercise due diligence to prevent and detect criminal conduct, to change internal control systems in some undefined way, to monitor and audit for crime detection, and to look for and report instances of “probable cause.”
• We believe the proposed rule is overreaching, and essentially would “deputize” contractors and subcontractors as agents of the IG.”
• The proposed regulation would also provide for suspension and debarment for a “knowing failure to timely disclose an overpayment on a government contract, or a violation of federal criminal law in connection with award or performance of any government contract or subcontract.”
• What constitutes a “knowing” failure and a “timely” disclosure of an overpayment is nowhere defined, but, under the explicit terms of the proposal, even a single overpayment could be fatal. The proposal is unduly harsh in this regard.
• “The proposed rule also states: “At a minimum, the contractor’s internal control system shall provided for the following: …Full cooperation with any Government agencies responsible for audit, investigation, or corrective action.”
• The proposed rule does not define “full cooperation,” but the comments in the Federal Register accompanying the proposal make clear that these words bear directly on a contractor’s ability to maintain its attorney-client privilege.
•  “Full cooperation” may also hold implications for preservation of an individual employee’s Sixth Amendment rights.
• “DOJ’s May 23, 2007, letter to the Councils followed on the heels of a significant DOJ loss in United States v. Stein, 435 F. Supp 2d 330 (SDNY 2006). That case involved a tax fraud prosecution in which the government, under a DOJ document called “the Thompson Memorandum,” decided that companies that pay defense legal fees for employees and former employees did not “cooperate,” and should therefore be criminally charged.
• “The conflict between a contractor’s ability to maintain its attorney-client privilege and the proposed rule’s “full cooperation” requirement is obvious – the government will argue that a contractor is not fully cooperating if the contractor does not waive its privilege and disclose the substance of communications with counsel.
• In another context, DCAA has requested audit access to privileged materials to assess allowability of consultant costs under FAR 31.205-33. See DCAA Contract Audit Manual ¶ 7-2105.2.
• If the government has pressed for privileged materials under a FAR provision that makes no mention of “full cooperation,” the government would likely interpret the proposed rule’s “full cooperation” requirement to be a “full waiver” of attorney-client privilege. Thus, contractors and subcontractors would be placed in the position of having to sacrifice their ability, and right, to consult with counsel on a confidential basis in order to do business with the federal government. This is unwise policy.
• DOJ may intend its proposed rule to accomplish indirectly what the Thompson Memorandum could not achieve directly.
• “Constitutional concerns aside, the proposed regulation by its terms would adversely affect normal litigation of claims and disputes at the boards of contract appeals and in the U.S. Court of Federal Claims."
• The above-quoted language literally would require “full cooperation” with “any Government agency responsible for audit, investigation or corrective action” as a “minimum” requirement for an acceptable system of internal controls.
• The breadth of this proposed language could open the contractor to provide “free discovery” (including documents and possibly interviews) to the government during the period that the contractor investigates whether it has a claim, formulates its claim and strategy for presenting and/or litigating the claim.
• During the claims and disputes process, a contractor would be required to respond to government discovery requests and continue to provide “full cooperation” as a part of its internal control system. This is an unacceptable imbalance in the well-established claims and disputes process. The contractor would have no similar ability to obtain such wide-ranging access to the government.
• Neither DOJ nor the government has provided any evidence that this sort of distortion in the well-established and well understood audit access and claims and disputes process is necessary to address some problem. Indeed, the DOJ May 23, 2007 letter is devoid of any evidentiary basis for its broad assertions and overreaching proposed regulations.

“To summarize,” said FEI's CGB in its comment letter, “we believe that the proposed rule would distort the contracting roles of contractors, subcontractors, and the government. It would appear to impose an unreasonable crime detection and prevention obligation on contractors and subcontractors, effectively making them agents of IG enforcement. The proposed rule would unnecessarily impose requirements already contained in the FAR and would cause both contractors and subcontractors to expand staffing and increase costs in an attempt to comply with the rule. In the end, this DOJ initiative would drastically increase costs with little or no added benefit to the Government or to the taxpayers."

FEI's CGB letter concluded that “industry supports a culture of values based on ethics, high integrity, and unwavering compliance to contract requirements. [H]owever, we do not believe this rule achieves this objective. Accordingly, we urge that this rule be withdrawn.”

FEI’s CGB formulates positions and comments on government policies that impact FEI members doing business with all sectors of the federal government and members of FEI's CGB are drawn from a broad cross-section of companies that do business with the government.

Prepared Jan. 14, 2008 by Edith Orenstein, Director, Technical Policy Analysis, Financial Executives International (FEI). This summary does not represent FEI opinion unless specifically noted above.