United States: Debunking Ten Common Myths About Suspension And Debarment

Contractors generally understand that suspension and debarment carry serious consequences, most significantly, the ineligibility to receive federal contracts. Nevertheless, several misconceptions about suspension and debarment persist in the contractor community. Below are ten of the most frequently encountered misconceptions, along with insight to help contractors successfully navigate this treacherous landscape.

MYTH #1: The contractor that has already settled and/or paid a fine with another agency or the Department of Justice (DOJ) will not be suspended or debarred.

REALITY: Many contractors that enter into a settlement agreement with the government begin looking forward to their fresh start. Some contractors are therefore surprised when they subsequently receive a Show Cause Notice or a Notice of Proposed Debarment from a Suspension and Debarment Official (SDO) based on the events underlying their settlement agreements. It is important to keep in mind that criminal and civil settlement agreements are not binding on SDOs. Whereas criminal and civil settlements are meant to resolve liability and hold contractors accountable for past misconduct, suspension and debarment exist for the distinct purpose of protecting the government from the business risk of future contracting with individuals or entities that are not presently responsible. Thus, when contractors or counsel refer to "global settlement," it is important to clarify whether this concept includes the administrative tools of suspension and debarment. Unless the SDO has decided to enter into an administrative agreement or to take a declination, a contractor should assume that global settlement excludes suspension and debarment.

The SDO will regard a contractor's settlement agreement and payment of any required penalty or fine as one factor to be considered in any suspension or debarment proceedings, rather than dispositive of whether the contractor should remain eligible for future government contracts. See FAR 9.406-1(a) (5) ("Before arriving at any debarment decision, the debarring official should consider such factors as the following: … (5) Whether the contractor has paid or agreed to pay all criminal, civil, and administrative liability for the improper activity, including any investigative administrative costs incurred by the Government, and has made or agreed to make full restitution."). Accordingly, a contractor should be prepared to demonstrate to the SDO that it is presently responsible (including through fulsome and detailed submissions and presentations addressing the contractor's internal controls, ethics and compliance function, management structure, employee training, etc.) rather than simply direct the SDO's attention to a prior settlement agreement with the expectation that the SDO will consider that agreement conclusive evidence of present responsibility.

MYTH #2: It is better for a contractor to lay low rather than approach the SDO proactively to self-report an issue that could lead to suspension or debarment.

REALITY: No one relishes the thought of disclosing their organization's missteps and mistakes to the government, for fear of the consequences that may follow. In some cases, a strategy of laying low, hoping the SDO does not learn about a situation that may give rise to a potential suspension or debarment, may seem quite appealing. While this strategy may pay off occasionally, it is important to recognize the various plusses and minuses of this strategy versus proactive engagement with an SDO.

First, the Mandatory Disclosure Rule1 may already require the contractor to disclose the issue to the government. If so, there may be no real benefit to laying low, because the Office of the Inspector General and the contracting officer can, and usually do, refer mandatory disclosures to the SDO.

Second, even if the Mandatory Disclosure Rule does not apply, FAR Subpart 3.10 (Contractor Code of Business Ethics and Conduct) may require the contractor to make certain disclosures, on pain of suspension and/or debarment. For instance, FAR 3.1003(a)(2) states: "Whether or not the clause at 52.203-13 is applicable, a contractor may be suspended and/or debarred for knowing failure by a principal to timely disclose to the Government, in connection with the award, performance, or closeout of a Government contract performed by the contractor or a subcontract awarded thereunder, credible evidence of a violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code or a violation of the civil False Claims Act. Knowing failure to timely disclose credible evidence of any of the above violations remains a cause for suspension and/or debarment until 3 years after final payment on a contract (see 9.406-2(b)(1)(vi) and 9.407-2(a)(8))." (Emphasis added).

Third, self-reporting to the SDO helps the contractor show that it is presently responsible. One of the mitigating factors that SDOs consider before making a final decision is "whether the contractor brought the activity cited as a cause for debarment to the attention of the appropriate Government agency in a timely manner." FAR 9.406-1(a)(2).

Fourth, SDOs and their support staff diligently monitor the news and stay abreast of government enforcement actions. As a result of these efforts, they may independently uncover the cause for potential suspension or debarment, and realize that the affected contractor has deliberately chosen not to bring the issue to their attention. While this does not mean that the contractor will be suspended or debarred, it may place the contractor at a disadvantage and make the SDO feel that the contractor is not particularly forthcoming, which may make it more difficult to resolve the matter on favorable terms.

MYTH #3: The contractor is too big and/or too critical to the government to be suspended or debarred.

REALITY: No contractor is immune from suspension or debarment. Some contractors mistakenly believe they are inoculated from the risk of suspension or debarment because they consider their products or services indispensable to the government. Contractors should be mindful that, regardless of the contractor's perceived importance, an SDO can suspend or propose debarment, if the circumstances warrant, and if the contractor's products or services are truly indispensable to an agency, the head of that agency can issue a compelling circumstances waiver. See FAR 9.405(a) ("Contractors debarred, suspended, or proposed for debarment are excluded from receiving contracts, and agencies shall not solicit offers from, award contracts to, or consent to subcontracts with these contractors, unless the agency head determines that there is a compelling reason for such action (see 9.405-1(b), 9.405-2, 9.406-1(c), 9.407-1(d), and 23.506(e))."2 Additionally, because agencies are not required to terminate existing contracts with entities that are suspended or debarred, FAR 9.405-1(a), agencies are not immediately deprived of any truly necessary products or services provided by an excluded entity. Thus, the FAR gives SDOs sufficient flexibility to use suspension and debarment to protect the government's interests without depriving the government immediately of a necessary source. Accordingly, while a contractor facing potential suspension or debarment should be prepared to explain to the SDO the nature of any mission-critical work it does for the government, it would be a mistake to assume that this makes the contractor immune to an exclusion.

MYTH #4: A lower tiered subcontractor, vendor, or supplier cannot be suspended or debarred.

REALITY: While it is generally well-known that subcontractors are subject to suspension and debarment, see FAR 9.406-2(c) and 52.209-6, many companies believe that they cannot be suspended or debarred if they are not a subcontractor named in the prime contract. Similarly, some companies believe that they cannot be suspended or debarred if they are identified in the contract documents as "suppliers" or "vendors" rather than as subcontractors. The reality is that there is no statute or regulation that requires the SDO to limit his or her focus only to the upper tiers of the contracting chain. Suspension and debarment prevents federal contracting dollars from being spent to benefit companies that are not presently responsible. SDOs can target any company that does business with the government directly or indirectly, even if that company is not the prime contractor or a higher-tiered subcontractor.

The definition of "contractor" in FAR 9.403 is quite broad: "Contractor means any individual or other legal entity that—(1) Directly or indirectly (e.g., through an affiliate) submits offers for or is awarded, or reasonably may be expected to submit offers for or be awarded, a Government contract, including a contract for carriage under Government or commercial bills of lading, or a subcontract under a Government contract; or (2) Conducts business, or reasonably may be expected to conduct business, with the Government as an agent or representative of another contractor." There is no definition of "subcontract" in FAR 9.4. The definition of "subcontractor" in FAR 3.502-1 (Subcontractor kickbacks) broadly includes "any person, other than the prime contractor, who offers to furnish or furnishes any supplies, materials, equipment, or services of any kind under a prime contract" and "includes any person who offers to furnish or furnishes general supplies to the prime contractor or a higher tier subcontractor." Given these broad definitions, and the fact that the purpose of suspension and debarment is to exclude entities lacking present responsibility from the federal procurement system, it is unlikely that a company could persuade an SDO that the company cannot be suspended or debarred because of its location in the lower tiers of the contracting chain. If a company has submitted an offer, or reasonably may be expected to submit an offer to another entity in a government procurement contracting chain, that company is susceptible to suspension or debarment should its present responsibility be called into question.

MYTH #5: An aggressive posture toward the SDO's office is the best strategy.

REALITY: Some contractors want to treat the SDO's office like an opponent in civil or criminal litigation, believing that a highly adversarial tone will intimidate the SDO from imposing an exclusion. This is almost always a grave mistake. Suspension and debarment proceedings are not the forum for litigating the underlying conduct. See FAR 9.407-3(c)(6)(i) (no fact finding if suspension is based on an indictment). A contractor that behaves in a brash or abrasive manner toward the SDO is only reinforcing the idea that the contractor is a difficult business partner for the government, and unhelpful when problems arise.

The better approach is to keep a level head, remember that the SDO is charged with protecting the government's interests, and demonstrate that the contractor is presently responsible. Because the SDO has considerable discretion, and a contractor whose present responsibility is in question typically has little to no leverage, a hostile or confrontational approach by the contractor is usually ill-advised.

MYTH #6: Contractors are entitled to a presumption of responsibility in suspension or debarment proceedings.

REALITY: Suspension and debarment are administrative, as opposed to criminal, procedures. Accordingly, there is no presumption of innocence, or presumption of present responsibility. The presumption of innocence exists in criminal proceedings because the accused's constitutionally protected liberty interest is at stake. There is no analogous constitutionally protected right to contract with the Government. See Transco Security, Inc. of Ohio v. Freeman, 639 F.3d 318, 321 (6th Cir. 1981) ("[D]eprivation of the right to bid on government contracts is not a property interest."). If the SDO has concerns about a contractor's present responsibility, the onus is on the contractor to demonstrate affirmatively that it is presently responsible; it is not the SDO's burden to establish that the contractor lacks present responsibility.

Because there is no presumption of responsibility, a contractor facing potential suspension or debarment typically does not benefit from remaining silent and letting outside counsel do all of the talking during a meeting with the SDO. In fact, SDOs normally expect contractor representatives to have substantive, speaking roles during meetings and presentations. Their participation helps the SDO to assess the sincerity of the contractor's response to the situation.

MYTH #7: The SDO will tell a contractor what it must do to be considered presently responsible.

REALITY: Some contractors mistakenly believe that they can request an in-person meeting with the SDO and ask the SDO what they should do to avoid suspension or debarment. In fact, some contractors might think it a good idea to tell the SDO that the contractor will implement any new policy or internal control measure that the SDO considers necessary. While this may seem like a good idea, the SDO is unlikely to be receptive to this approach. SDOs want to hear from the contractor about what steps its board of directors and/or management have taken in response to the underlying incident. The SDO is not akin to an external monitor charged with making recommendations. Rather, the SDO's role is to assess whether the contractor is likely to be a trustworthy business partner for the US Government. A trustworthy business partner has already developed and implemented effective internal controls, well-functioning governance systems, and robust ethics and compliance functions. A trustworthy business partner has already figured out how to achieve competent performance and avoid default terminations. Accordingly, an SDO may draw an adverse conclusion about a contractor that uses the in-person meeting to request that the SDO make recommendations about how to improve the contractor's internal processes and functions. The contractor should enter the SDO's office with a clear and compelling case to make about the steps already taken and in progress to remedy past issues and prevent future reoccurrences.

MYTH #8: The SDO will generally issue a pre-notice letter (i.e., a show cause notice or request for information) prior to imposing suspension or proposing debarment.

REALITY: It is true that the use of pre-notice letters has increased dramatically since 2009, when the Interagency Suspension and Debarment Committee (ISDC) began collecting and reporting statistical information about suspension and debarment. The ISDC's most recent report to Congress indicates that the number of agencies using pre-notice letters in 2009 was only 7, compared to 14 in 2017.3 Additionally, the number of pre-notice letters increased by 21% between 2016 and 2017.4

Nevertheless, the decision of whether to initiate an action with a pre-notice letter or with an exclusion (i.e., a suspension or a proposed debarment under the FAR) rests squarely within the SDO's discretion. A contractor is not entitled to a pre-notice letter. The trend of increased use of pre-notice letters likely reflects the growing maturity of the suspension and debarment functions across numerous executive branch agencies, such that SDOs and their staff are able to parse incoming referrals and sort them according to the level of exigency they present. Contractors should therefore expect that in cases where the circumstances suggest that immediate action is necessary to protect the Government's interests, the SDO will not hesitate to impose a suspension. Contractors facing situations that an SDO might interpret as presenting an immediate need to protect the government should give serious consideration to approaching the SDO's office proactively, thereby presenting its side of the story to the SDO, at least on the issue of the need for immediate action to protect the government.

MYTH #9: The SDO will impose suspension or debarment with surgical precision, omitting affiliates that were not involved in the underlying causal action.

REALITY: The SDO will take as broad an action as he or she believes is required to protect the government's interests. If the cause for suspension or debarment arises from an ineffective or non-existent ethics and compliance function, or from some other over-arching cause, the SDO may conclude that the contractor's affiliates are as much a business risk as the contractor itself. Affiliates of a respondent can be suspended or debarred so long as they are provided notice and an opportunity to respond. FAR 9.406-1(b). A contractor facing a potential cause for exclusion that wants to protect its affiliates from being included in any suspension or debarment activity should consider, as proactive engagement with the SDO, explaining how its affiliates are sufficiently removed or differentiated so as not to be implicated in the circumstance that brings the respondent before the SDO.

MYTH #10: The SDO will be receptive to an administrative agreement.

REALITY: Not necessarily. An administrative agreement preserves the respondent's eligibility to receive federal contracts, which an SDO will not leave intact if there is reason to believe that it will take a long time for the contractor to become presently responsible. Other circumstances could cause an SDO to reject an administrative agreement, such as a contractor declining to terminate a problematic employee or dismantle an ineffective management structure. Additionally if the SDO lacks confidence in the contactor's will or ability to abide by the terms of an administrative agreement, there is little likelihood that the SDO will agree to an administrative agreement.

The use of administrative agreements has increased from 2009 to 2017, with about double the number of administrative agreements in 2017 as in 2009.5 Nevertheless, the overall number of administrative agreements remains low. There were 64 administrative agreements in 2017, compared with 604 suspensions, 1,613 proposed debarments, and 1,423 debarments.6

Footnotes

1 FAR 52.203-13(a)(3) provides: "The Contractor shall timely disclose, in writing, to the agency Office of the Inspector General (OIG), with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of this contract or any subcontract thereunder, the Contractor has credible evidence that a principal, employee, agent, or subcontractor of the Contractor has committed - (A) A violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code; or (B) A violation of the civil False Claims Act ( 31 U.S.C. 3729- 3733)."

2 Current and prior compelling circumstances waivers are available on the website of the Interagency Suspension and Debarment Committee. See Compelling Reasons Determinations.

3 See July 31, 2018 ISDC Report to Congress at p. 3.

4 Id.

5 See July 31, 2018 ISDC Report to Congress, supra note 2, at p. 9.

6 Id. at p. 2, 3.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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