Why Periodic Independent Third-Party Reviews of Ethics and Compliance Programs are Good Ideas (And Good Business)

Government contractors seeking to proactively protect themselves against civil False Claims Act (FCA) liability and suspension and debarment often seek a third-party review of their ethics and compliance programs – even where those programs have been long established.  Several recent FCA cases demonstrate that such reviews can have a meaningful effect on a court’s determination of the contractor’s scienter, positively impacting a defendant’s ability to obtain dismissal of such a case.

In the absence of evidence of clear intent or willfulness, federal courts considering FCA liability will consider the contractor’s conduct under the standards of “reckless disregard” or “deliberate ignorance.”  Federal prosecutors and whistleblowers sometimes allege that the company has ignored employee complaints of noncompliance or that the company’s compliance programs have been poorly implemented or communicated.  For example, in United States ex rel. Prather v. Brookdale Senor Living Cmtys., Inc.,892 F.3d 822, 838 (6th Cir. 2018), the Sixth Circuit focused heavily on the fact that the defendant company had “deliberately ignored” various employee concerns regarding compliance with applicable federal regulations.

Similarly, in United States ex rel. Bawduniak v. Biogen Idec. Inc., 2018 WL 1996829 (D. Mass. Apr. 27, 2018), the District Court found that the defendant contractor ignored the concerns communicated by its Compliance Department.   Bawduniak underscores the importance of the Board of Directors and contractor management having a modern company’s ethics and compliance program as well as processes for receiving and responding to Compliance Department actions and findings.

In yet another case, reckless disregard by a defendant company was found by the court when, after delegating certain compliance duties to employees, the company thereafter failed to follow up and ensure compliance.  United States ex rel. Schmuckley v. Rite Aid Corp., 2018 WL 4214887 (E.D. Cal. Sept. 5, 2018).

Each of these cases highlight the fact that having an ethics and compliance program, alone, is not enough.  Ensuring the effectiveness of the program through third-party reviews is often the best way to detect obstacles that impose unnecessary risk to the company.  These recent judicial findings are consistent with the U.S. Sentencing Guidelines which recite the requirement that a company will “evaluate periodically the effectiveness of the organization’s compliance and ethics program.”  Likewise, guidance issued by both DOJ and the SEC indicates the expectation that companies test its internal controls, assess weaknesses and risk areas, and periodically conduct targeted audits of controls.

In addition to potential FCA liability, contractors must protect their “present responsibility” status, which can be their most important asset.  Suspension or debarment of a contractor can have catastrophic business impacts, precluding that entity from receiving working on or competing for government contracts for years.  Furthermore, the FAR’s internal compliance program and mandatory disclosure mandates require contractors to bear the burden of self-policing and self-reporting their own activities or risk damaging their reputations as responsible contractors.  These activities necessitate having a sound ethics and compliance program with adequate internal processes to ensure that the contractor can meet its compliance obligations and minimize the risk of suspension or debarment.

A periodic third-party review of an ethics and compliance program, whether characterized as sound company management and Board fiduciary duties or as a form of potential insurance policy against FCA allegations, is essential.  Contractor Integrity Solutions regularly provides such services on a fixed fee basis with a well-defined scope.

Contact Contractor Integrity Solutions:

Steve Shaw

Mike Eberhardt

Andy Liu