Privatizing Essential Government Services in the age of Covid

The Washington Post ran this story today. I'm excerpting for teasers. Read the article at the link provided.

How the U.S. vaccination drive came to rely on an army of consultants 

Private contractors cost taxpayers millions while demonstrating few clear results and papering over weaknesses in the country’s public health system

When Gavin Newsom outsourced key components of California’s vaccine rollout to the private sector during the pandemic’s darkest days last winter, the Democratic governor promised the changes would benefit the most vulnerable.  His “number one” reason for handing the reins to Blue Shield of California, an Oakland-based health insurance company, was “equity” — delivering vaccine doses to those at greatest risk, many in communities of color, he said in February.

But the $15 million contract with Blue Shield, plus another $13 million for McKinsey, did not deliver on that promise, according to state and county officials, as well as public health experts.

California wasn’t alone in using private contractors to manage the vaccination campaign. At least 25 states, along with federal agencies and many cities and counties, hired consulting firms, according to a Washington Post tally. The American vaccination drive came to rely on global behemoths such as McKinsey and Boston Consulting Group (BCG), with downsized state and local health departments and even federal health agencies relying on the private sector to make vaccines available to their citizens, according to hundreds of pages of contract documents, emails and text messages obtained through public records requests.

McKinsey’s role extended beyond California to other states, including Ohio and New Jersey. Deloitte worked in 10 states. BCG received millions of dollars from the federal government to coordinate vaccine planning, while at least 11 states also worked with the company, in some cases paying it to address gaps in federal planning.

Consultants say they helped save lives by supporting overextended public servants with specialized expertise. “Our work helped state decision-makers quickly size up key factors impacting the effective distribution of vaccines,” said McKinsey spokesman Neil Grace. “All our work was based on state-defined priorities, and the data we analyzed was provided by state and local public health authorities.”

Complicating matters, some contractors contributed to the political campaigns and projects of elected officials who then became clients, prompting allegations of favoritism. Such questions have surrounded the no-bid contract Newsom gave to Blue Shield, which helped finance his political campaigns and signature housing initiative. 

 By farming out vital health services, from disease surveillance to contact tracing to vaccine distribution, state and local governments have eroded their own capacity, experts argue, making Americans more reliant on private companies to safeguard their health. The weaknesses are all the more glaring with the delta variant’s devastating march through the United States, enabled partly by insufficient penetration of vaccines.  

President Biden insisted there was “no plan to vaccinate most of the country” when he took office in January. Yet there was a plan, or at least the promise of one, and it relied on Boston Consulting Group. For $4.9 million, the Centers for Disease Control and Prevention made BCG responsible for “driving planning for vaccine distribution and administration,” according to a contract with the firm signed in September 2020 and extended this March for another $4.7 million. 

The contract called for the creation of a “robust central infrastructure” supported by “accountability mechanisms” to coordinate federal, state and commercial immunization plans.  A CDC spokeswoman, Kristen Nordlund, compared BCG to a “counselor in that they have been integral in listening to the needs of the states and helping distill that down so CDC can take action.” The firm’s services focused on data analysis and program management, BCG spokeswoman Nidhi Sinha said in an email.

 But some of the consultants lacked expertise in logistics and immunization. Instead of the “targeted program management support” promised in the contract, consultants often performed rudimentary services, such as taking notes during calls between states and the CDC, and then organizing that information in PowerPoint slides for presentations, agency officials said.  Sinha disputed that characterization, saying the CDC project was co-led by an expert with a PhD in infectious-disease epidemiology and an emergency medicine physician. 

No state went as far as California in handing over the reins to contractors — putting Blue Shield in charge of the network of providers administering shots, with assistance from Kaiser Permanente and McKinsey.

Inside the state’s public health department, some officials first learned these duties were being outsourced when they were instructed to transmit vaccine allocation data to McKinsey consultants, according to a state health official. “We were just told today about this, but have no details about how it’s going to work,” the official told The Post in late January.

Michael Condrin, chief operating officer for ambulatory care at the University of California at Davis, could not fathom why an insurance company was selected. “Blue Shield?” he wrote to colleagues. “They needed to pick Fed Ex, UPS, or Amazon.” Ann Boynton, a former state official who managed California’s nearly $10 billion health benefits program for public employees and now serves as a top administrator at UC Davis, agreed, noting of Blue Shield, “they’re not experts in distribution and delivery.”

Details of the contract also shocked UC San Diego Health’s associate chief medical officer, Chris Longhurst, who said the health center had managed to run the state’s first mega-site without support from the insurer or from McKinsey.  “Glad they all got a state bailout,” he wrote in an email to colleagues.

It's an eye-opening article, but contested.  Fortunately for the states, it seems that Uncle Sam may have picked up a lot of the bill for those contracts.

 

 

 

Race, Religion, and Privacy: Oh My!

Government Contracting does not exists in a vacuum. It exists within the public domain, with governance features that distinguish it entirely from private contracting.

 Lexology, always a reliable source for government contracting updates (and more), hit a trifecta of such features with its procurement related article selections that hit my inbox today.  Here's a brief sampling of them.

Race: Executive Order Prohibiting Bias Training? Ignore That. DoD Issues Class Deviation to Comply with Nationwide Ban on EO 13950 Provisions

On January 6, 2021, the DoD issued a class deviation, effective immediately, to implement the nationwide court order enjoining Sections 4 and 5 of Executive Order (EO) 13950, Combating Race and Sex Stereotyping. EO 13950 prohibits federal agencies, contractors, and grant recipients from using workplace diversity and inclusion trainings to “promote race or sex stereotyping or scapegoating,” with Section 4 applying specifically to government contractors.

That new Court Order trumped Executive Order 13950. Also see Venable's post,Dismantling EO 13950 – Nationwide Preliminary Injunction Results in Suspension of Enforcement Measures for a bit more flavor and information.

For the foreseeable future, Federal contractors, subcontractors, and grant recipients alike no longer need to comply with or worry about the enforcement of EO 13950, especially given President‑elect Joe Biden's very recent announcement that he is appointing Boston Mayor Marty Walsh as the Secretary of Labor. In particular, Mayor Walsh has issued executive orders over the past few years that declare racism an emergency and public health crisis with the goal of "dismantl[ing] [] systemic racism"; acknowledge and improve racial equity through government, as further reported on here; and "create a national model for breaking down system racism across all aspects" of Boston, as reported here. Given that history, it is likely safe to assume that, if confirmed, Mr. Walsh has no intention of advancing policies akin to those in EO 13950.

Religion: OFCCP Issues Final Rule on Religious Exemptions for Government Contractors

The Office of Federal Contract Compliance Programs issued Implementing Legal Requirements Regarding the Equal Opportunity Clause’s Religious Exemption final rule, which becomes effective on January 8, 2021. The final rule is intended to clarify the scope and application of the religious exemption in light of recent developments, including Supreme Court rulings and Executive Orders. Among other things, it clarifies that, in addition to churches, the exemption covers employers that: are organized for a religious purpose; hold themselves out to the public as carrying out a religious purpose; engage in exercise of religion consistent with and in furtherance of a religious purpose; and either operate on a not-for-profit basis or present other strong evidence that their purpose is substantially religious. Moreover, religious employers may condition employment on compliance with religious tenets, as long as they do not discriminate on other protected bases. This particular provision has caused concern, as some have interpreted it to permit discrimination against LGBTQ individuals. Among its key provisions, the final rule adds a rule of construction to provide the maximum legal protection of religious exercise permitted by the Constitution and laws, including the Religious Freedom Restoration Act.

Privacy (well, one person's privacy is another person's transparency): New Corporate Transparency Act Will Impose Beneficial Ownership Reporting Requirements on Many Companies, Particularly Small Businesses

The Corporate Transparency Act (CTA), part of the 2021 National Defense Authorization Act enacted into law on January 1, 2021, will impose new beneficial ownership reporting requirements on many companies. The stated purposes of the CTA include the collection of beneficial ownership interest information for corporations, limited liability companies and similar entities "to (A) set a clear, Federal standard for incorporation practices; (B) protect vital United States national security interests; (C) protect interstate and foreign commerce; (D) better enable critical national security, intelligence and law enforcement efforts to counter money laundering, the financing of terrorism and other illicit activity; and (E) bring the United States into compliance with international anti-money laundering and countering the financing of terrorism standards." Many types of entities, however, are exempted from the requirements of the CTA. These entities include, among others: public companies; governmental entities; banks and bank holding companies; credit unions; broker dealers; registered investment companies; registered investment advisers; insurance companies; registered public accounting firms; public utilities; certain pooled investment vehicles; 501(c) entities; companies with more than 20 full-time employees in the United States, more than $5 million in gross receipts or sales, and an operating presence at a physical office in the United States; and entities owned or controlled by one or more of such exempt entities. A reporting company will be required to identify each beneficial owner and applicant and report the individual's full legal name, date of birth, current residential or business address, and a "unique identifying number from an acceptable identification document" (generally a nonexpired passport, state issued driver's license or identification card or, if the individual does not have any of these, a nonexpired foreign passport) or a FinCen identifying number. The reporting company need only report the name of the exempt entity having a direct or indirect ownership interest in the reporting company (and not any of the other identifying information otherwise required). There are many issues of scope, definition and interpretation in the CTA which are expected to be addressed by the Treasury's forthcoming implementing regulations.

See, also, How do you determine prospective contractor responsibility if you don't know who the contractor really is?

NASA Adminsitrator bounced by an unusually cozy relationship with federal regulators

Although federal procurement directives are moving towards acquisitions of supplies and services described in terms of common commercial standards, some needs of the government can only be met by particularized specifications and contractors. Take, for instance, spaceships (although we are now seeing the development of private sector contractors even in the space field, a circumstance not dreamed of when space exploration began in the era of Sputnik).

Why commercial standards? In a word, competition. As the American Bar Association Model Procurement Code elucidates,

"Fair and open competition is a basic tenet of public procurement. Such competition reduces the opportunity for favoritism and inspires public confidence that contracts are awarded equitably and economically." Code § 3-201, Commentary 3.

Indeed, an fundamental purpose and policy of the Model Procurement Code is "to foster effective broad-based competition within the free enterprise system". §1-101((2)(g). And, this is not a mere aspiration. "It is the general policy of this [State] to procure standard commercial products whenever practicable. In developing specifications, accepted commercial standards shall be used and unique requirements shall be avoided, to the extent practicable." MPC Regulation § R4-201.01.2 "All specifications shall seek to promote overall economy for the purposes intended and encourage competition in satisfying the [State's] needs, and shall not be unduly restrictive." MPC § 4-205. Further, in general, "Correction or withdrawal of a bid because of an inadvertent, non-judgmental mistake in the bid requires careful consideration to protect the integrity of the competitive bidding system, and to assure fairness. If the mistake is attributable to an error in judgment, the bid may not be corrected." MPC § R3-202.11.1

One of the big impediments to preferring standard commercial products and standards is the pushback and lobbying of entrenched contractors, the "good old boy" network. The basis for such a network is understandable from the standpoint of preferring the devil we know, but it runs foul of the demands of procurement when we become enamored of those well-known devils.

This post, and the article from the Washington Post that inspired it, illustrate the kind of relationship that can, and often does, call such discrimination into question. Once again, I caution that I slice and dice, rearrange, omit, and shade original articles to fit the didactic intent and space of this blawg, to be read as a hypothetical for educational purposes, and not as evidence or insinuation of guilt or wrongdoing. So, you are IMPLORED to link to and read the source material cited, and do not to rely on the rendition here.

Boeing tried to amend bid after guidance from NASA official, raising concerns it received inside information

After a top NASA official contacted a senior Boeing executive about a bid to win a contract potentially worth hundreds of millions of dollars, the company attempted to amend its proposal past the deadline for doing so, according to the article. That raised alarm bells inside the space agency, where officials were concerned that Boeing was attempting to take advantage of inside information. The conversation at the root of the investigation was between Loverro and Jim Chilton, the senior vice president of Boeing’s space and launch division, putting one of the company’s top executives in the middle of the probe.

Federal procurement regulations encourage the government to communicate with contractors about their bids to help agencies get the products and services that best fit their requirements. “The question becomes when is it okay to have those discussions, and more importantly, whether you have to have the exact same discussions with all potential bidders,” said David Berteau, the president and chief executive of the Professional Services Council, a trade group that represents federal contractors. According to the article, a person with direct knowledge of the matter who spoke on the condition of anonymity because of the ongoing investigation said: “I can tell you with 100 percent confidence that no laws were broken. What we are talking about are conversations that occurred outside the normal dictated channels but didn’t violate the sanctity of the procurement process.”

According to a congressional aide with knowledge of the matter, NASA procurement officials grew concerned earlier this year when Boeing contacted the agency, saying it wanted to change parts of its bid for the lunar lander contract. Not only was it late in the process, but the specificity of Boeing’s proposed changes raised “red flags” inside NASA that the company had received inside information improperly. NASA officials wondered, “How did they know to raise this issue or try to fix this issue?” according to the aide, who spoke on the condition of anonymity because of the ongoing investigation.

NASA officials have stressed that the agency has gone to great lengths to ensure the integrity of the contract awards, worth $1 billion combined, that went to teams led by Jeff Bezos’s Blue Origin and Dynetics, as well as Elon Musk’s SpaceX.

Ultimately, the matter was referred to NASA’s inspector general office, and NASA’s leadership last month forced Doug Loverro to resign from his position as the associate administrator of NASA’s human spaceflight directorate. In his resignation letter, Loverro wrote that he took “a risk earlier in the year because I judged it necessary to fulfill our mission. Now, over the balance of time, it is clear that I made a mistake in that choice for which I alone must bear the consequences.” The inspector general investigation could be another headache for Boeing, under fire for having an unusually cozy relationship with federal regulators, especially if it identifies wrongdoing on the part of Boeing senior executives.

In an interview with The Post last month, Loverro said he was trying to speed up the Artemis moon program to meet a White House mandate to return astronauts to the lunar surface by 2024. “It had to do with moving fast on Artemis, and I don’t want to characterize it in any more detail than that,” he said.

But the probe is also focusing on Boeing, officials said. “This certainly goes both ways. It’s one thing to have a mistake that violated the Integrity in Procurement Act,” the aide said. “It’s another if the company took that information and acted on it.”

FURTHER READING:

• Special Compliance Requirements for Government Contractors Part 1, and Part 2

• FAR 52.203-13 Contractor Code of Business Ethics and Conduct.

May the Force be with you

One medical website describes an epidemic as including "any problem that has grown out of control". It distinguishes pandemic by the breadth of the "problem".  "An epidemic becomes a pandemic when it spreads over significant geographical areas and affects a large percent of the population. In short, a pandemic is an epidemic on a national or global level."


Now, of course, that website was referring to disease, a disease usually caused by a tiny, hard to decipher critter of some sort. one which at the extreme threatens the survival of the human or  other species.  But, by that definition, in a world organized by contracts, the world is now also caught in the grips of a force majeure pandemic. One London based firm, Farrer & Co., elucidates (though, in my usual slice and dice tossed salad rendition, I have "taken license" of their explanation to assist the mad scheme of this blog, so you are implored to read the original at that link):

Attention is now turning to whether businesses and their suppliers, customers and commercial partners can continue to perform their contractual obligations in spite of the fundamentally different situation in which they find themselves and, if not, what consequences flow from that.

These events shine a spotlight on contractual small print and legal concepts that perhaps provoked little thought in more normal times. They may now be critical to business survival.

Contrary to common perception, there is no statutory or common law definition of force majeure or a force majeure event in English Law. The parties to a contract therefore have the freedom to agree what will amount to a force majeure for the purpose of their contract and what the consequences will be if such an event happens. That means there are no generic answers to questions about how force majeure applies – each party must look at the wording of their own contracts to establish how it works in the relevant circumstances.

That caveat makes Dr. Fauci's assertions and Trump-inspired qualifications look down right transparent. But, it is a sound description of the beast.

As the authors cited cautioned, "This note is designed to be of general application," and it does pretty well hold true around the world, regardless of legal system. So, again, if you need a broad grounding in force majeure, that article is a good place to start. Another broadly examined article dealing generally with the force majeure-like factual issues that arise in this particular Covid-19 pandemic I'd recommend is Coronavirus/COVID-19: Implications for Commercial and Financial Contracts from the firm Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates.

Given the vagueness, or vagaries, of legal theories resulting because of or in the midst of a medical pandemic, and the slippery facts upon which it all rests, I do not attempt to provide my own discussion of the legal issues. But, all you have to do is search online the topic "covid-19 force majeure" and you will see a swarm of force majeure discussions from around the globe, each lying in wait for your interest.

Follow the money

With every disaster comes disastrous spending.  And attempts to stem the flow.  So many attempts.  Sad.

Here's an illustration of the money flow, from the source to the see (sic), all courtesy of Covington & Burling LLP.

GAO Report Reveals New Insights Into Lobbying Disclosure Act Compliance and Enforcement:

"The 2020 annual report from the Government Accountability Office (“GAO”) provides new details regarding the state of Lobbying Disclosure Act (“LDA”) compliance and enforcement. By statute, the GAO is charged with conducting random audits of LDA compliance and submitting reports reflecting the results to Congress. This year’s audit reviewed approximately 100 quarterly “LD-2” reports filed by lobbyist employers and lobbying firms and about 160 semi-annual “LD-203” reports that disclose political contributions and politically-related contributions.

"Many takeaways from this year’s review were consistent with past reports. Lobbying registrants still often neglect to round their lobbying expenses and lobbying income to the nearest $10,000. Many registrants also fail to disclose the prior covered government positions held by newly-registered lobbyists. And many LDA reports continue to be amended after a registrant learns of the audit — a fact that GAO believes “suggests that our contact may spur some lobbyists to more closely scrutinize their reports than they would have without our review.”

"But the 55-page report does include some interesting new nuggets:

     • "Missing Political Contributions. Almost half (45%) of audited registrants failed to report political contributions on their semi-annual LD-203 political contribution reports. GAO described this as a “statistically significant” increase over prior years. This is a preventable error. Prior to filing, registrants should consider cross-checking the LD-203 reports versus Federal Election Commission reports to ensure there are no missing contributions.
     • "JACK Act Certifications. Pursuant to a new statute, the JACK Act, lobbyists are now required to certify they have not been convicted of certain crimes. This year, GAO audited the accuracy of these reports, including by conducting criminal background checks on names listed in the reports. While it found no errors, GAO’s background checks underscore the importance of conducting due diligence to confirm the accuracy of these representations.
     • "Naming and Shaming. The report singles out, by name, two lobbying firms that “declined to meet with us following our initial letters.” The failure to meet led to GAO reporting the names of these firms to Congress.
     • "Low Enforcement Levels. While there has only been a trickle of LDA civil enforcement cases in the last decade, the trickle has begun to dry in recent years. Only one civil attorney now handles LDA enforcement part-time (down from two in 2017). Moreover, GAO announced that “no suits have been initiated or cases settled since our 2018 lobbying report.” Those prior cases, GAO emphasized, have all involved “chronic offenders”."

Whistleblowers Watch Stimulus Money From Inside from the firm Squire Patton Boggs.

"Whistleblowers, with their unique access to business operations, follow the money to learn whether the business abides by the strings attached to that money. Whistleblowers look for an opportunity to cash in on what they consider fraudulent conduct. What’s a business to do?

Strings Attached

"We recently advised about the many strings attached to the trillions of dollars available from the stimulus packages. Government watchdogs aggressively will scrutinize what happens to that money from the outside. If they find fraudulent conduct, they will seek recovery under the federal False Claims Act (FCA) not just for the amount of loss to the government but for up to three times that amount (known as treble damages).

Whistleblower Incentives

"Whistleblowers are employees on the inside who know what procedures are in place, what procedures they think should be in place, and the people to who make decisions about those procedures. The FCA incentivizes whistleblowers to capitalize on their invaluable insight by filing a lawsuit (a qui tam suit) reporting what appears to be fraudulent conduct to the government watchdogs. The rewards are great. Whistleblowers receive 15% to 30% of the amount of any recovery. In addition, the business is required to pay attorney’s fees to the whistleblower.

"Those incentives work. Whistleblowers are the source of most recoveries under the FCA. We reported that qui tam law suits in 2019 were being filed at the rate of more than 12 per week. Whistleblowers personally recovered more than $271 million in payments. The government itself recovered more than $2.2 billion in those qui tam suits. This far outstrips direct enforcement actions brought by the government without a whistleblower. Now that trillions of dollars are flowing, whistleblowers know the rewards are even greater.

Proactive Action

"A business that needs a recovery stimulus should obtain the relief that is available. From small businesses, nonprofits, venture-backed startups, higher education institutions, and healthcare to trade, supply chains and defense, and other regulated industries, Squire Patton Boggs attorneys are here to help you receive the much-needed assistance.

"But vigilance also is needed. Prepare to account for the money received by, for example, ensuring

     • Protocols are established to handle the money
     • Compliance programs are in place
     • Compliance programs operate effectively
     • Clear and readily available channels handle complaints remotely
     • Tone at the top encourages employees to report problems to leadership"

Past as Prologue: The Wave of Investigations to Follow the Pandemic Recovery and Actions that Companies Can Take Now to Prepare from, again, Covington & Burling LLP.  

"On March 30, 2020, the inspectors general of several major agencies selected the Department of Defense Inspector General, Glenn Fine, to lead a newly created federal oversight entity that will investigate waste, fraud, and abuse in connection with the massive new coronavirus economic relief legislation. The inspectors general were exercising new authority contained in the legislation, but these actions also echo Congress’s past approach to oversight of recovery efforts. This client alert examines the new investigative authorities in the legislation and provides advice for companies, based on past examples.

"Throughout American history, when Congress has confronted a national emergency and authorized a major government response, the economic recovery has almost always been accompanied by significant congressional, civil, or criminal investigations. This paradigm dates back at least to the Civil War, with Congress’s Joint Committee on the Conduct of the War. In modern times, the savings and loan crisis and bailout of the late 1980s led to criminal convictions and the Keating Five lobbying scandal.

"Most recently, after the 2008 financial crisis, Congress sought to formalize and institutionalize the oversight and investigation of recovery efforts through the Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) and other oversight bodies. A Congressional Oversight Panel held 26 hearings over more than two years on the causes, symptoms, and effects of the economic crisis and government response and reform efforts. Investigations by just one entity, the Recovery Accountability and Transparency Board, resulted in 1,665 convictions, pleas, or judgments, along with more than $157 million in recoveries, forfeitures, seizures, and other savings.

"In the newly enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), Congress again provided that oversight and investigations will accompany the $2 trillion relief program:

"The bill establishes a Special Inspector General for Pandemic Recovery within the Department of the Treasury. The Special Inspector General will be presidentially appointed, as was the SIGTARP. The Special Inspector General will be responsible for conducting, supervising, and coordinating audits and investigations of the making, purchase, management, and sale of loans, loan guarantees, and other investments by the Treasury under the CARES Act. Like the SIGTARP, the Special Inspector General for Pandemic Recovery will also be responsible for providing quarterly reports to Congress. Congress dedicated $25 million of new Treasury funds for the Special Inspector General to carry out these duties.

"The bill establishes a Pandemic Response Accountability Committee within the Council of Inspectors General on Integrity and Efficiency to prevent and detect fraud, waste, abuse, and mismanagement of funds and to mitigate risks across programs and agencies. Congress appropriated $80 million for the Committee. This new Committee appears to be modeled on the Recovery Accountability and Transparency Board established by the American Recovery and Reinvestment Act of 2009 (ARRA), which is generally viewed as having successfully protected against the misuse of recovery funds. Although the Recovery Board was required to coordinate its activities with various agency inspectors general, the new Pandemic Committee is created within the Inspectors General Council. This may mean that the Pandemic Committee will have a heightened degree of autonomy and a greater ability to act quickly and with better coordination than was the case for the Recovery Board. The Pandemic Committee is authorized to issue subpoenas to persons outside of the government.

"The bill authorizes the creation of a bipartisan Congressional Oversight Commission charged with oversight of the Treasury Department and Federal Reserve, as they work to provide economic stability in the wake of the coronavirus. Like the TARP Congressional Oversight Panel, the CARES Act’s Congressional Oversight Commission will consist of five members appointed by the leaders of Congress. Also like its predecessor, the Congressional Oversight Commission will have significant authority to conduct oversight and investigations, including holding hearings and taking testimony.

"In addition to these new entities, existing authorities are certain to continue to investigate. For example, the House Oversight and Reform Committee has already launched an investigation of travel insurance companies and their coverage decisions related to travel cancelled due to the coronavirus. It is likely that congressional committees will examine the administration’s preparedness and response to the crisis, along with the activities of deeply affected companies and industries, especially those that receive federal aid. If history is a guide, these investigations will continue for many years into the future. For example, as late as last year, the House Financial Services Committee held a hearing that focused on bank accountability “10 years after the Financial Crisis.” The CEOs of Citigroup, JP Morgan Chase, Morgan Stanley, Bank of America, Goldman Sachs, and others all testified.

"Criminal authorities will also continue to investigate. Attorney General William Barr has directed federal prosecutors to prioritize investigations and prosecutions of coronavirus fraud schemes, and Deputy Attorney General Jeffrey Rosen directed each U.S. Attorney’s Office to identify a prosecutor to serve as the lead coronavirus fraud coordinator. These developments mirror actions that were taken after the financial crisis. For example, SIGTARP investigations related to fraud involving TARP funds resulted in enforcement actions against nine financial institutions and in the successful criminal prosecutions of 51 bank officers and executives. The Department of Justice—including through a Financial Fraud Enforcement Task Force and a Residential Mortgage-Backed Securities Working Group—investigated fraud related to the financial crisis itself, ultimately resulting in several multi-billion dollar civil settlements with financial institutions.

"Of course, the investigations that will follow the coronavirus recovery will not be exactly the same as the investigations of the financial crisis or the savings and loan bailout. Each new crisis has its own unique attributes and characteristics. Nonetheless, based on our experience defending companies and individuals involved in similar investigations, we can offer the following five tips for being prepared:

     1. Invest in compliance now to avoid problems in the future. Companies need to understand the implications of taking federal money and establish systems that ensure compliance. For example, companies that benefit from increased federal investment in pandemic responses may have increased compliance obligations as a result of contracting with the government. Certain of the federal relief programs contain restrictions on executive compensation. Even the process of seeking federal assistance may implicate laws that regulate lobbying, depending on the agencies or officials contacted.
     2. Consider the public and political dynamics of corporate actions. Congressional investigators often follow where the press leads, and investigative reporters will be looking for juicy stories to highlight. Some recipients of prior federal funds were criticized for paying bonuses, moving jobs overseas, or even for their executives’ vacation arrangements. By seeking and accepting public funds, companies will often be held by the public and Congress to a higher standard.
     3. Understand your company’s areas of vulnerability. Companies in certain industries already face a high risk of investigation. Industries involved in the response to the crisis—including the biopharmaceutical, technology, consumer goods, and medical device industries—could have their actions scrutinized closely. Sometimes companies with the best intentions, such as rushing to respond to a pandemic, will take risks that would not be warranted upon reflection. Companies should have a clear understanding of these vulnerabilities and a clear and compelling answer to after-the-fact criticisms.
     4. Involve your legal department in business decisions. With the vast majority of employees working from home, and business situations moving rapidly, there are significant risks that business decisions can be made in “silos” without proper examination by all relevant parts of the company, including the legal department. The coronavirus pandemic has placed pressure on government regulators, including the Food and Drug Administration and others, to relax tightly controlled regulatory regimes. This dynamic also creates opportunities for industry, including for companies that may seek to develop new product lines or otherwise re-tool their manufacturing processes to meet current demand for hand sanitizers, facial masks, and other products and supplies needed during the pandemic. It is critical to involve the legal and compliance functions in these business decisions in order to mitigate a host of risks, including missteps with the federal government that could lead to regulatory or criminal exposure.
     5. Carefully vet all applications for assistance and other submissions to the federal government. In order to review applications and other submissions quickly and exercise judgment about the suitability of individual institutions to receive funds, the government will need to rely on representations, attestations, and certifications made by applicants. Companies and their counsel should carefully vet such statements with an eye toward the potential civil and criminal risks associated with submissions to the government. Civil and criminal authorities will focus on such submissions and other disclosures in any eventual investigations, and companies should seek to mitigate this risk with proper planning and legal review processes on the front-end."

UPDATE TO THIS STORY:

As reported in the final article above,"The [Congress']bill establishes a Pandemic Response Accountability Committee within the Council of Inspectors General on Integrity and Efficiency to prevent and detect fraud, waste, abuse, and mismanagement of funds and to mitigate risks across programs and agencies. ... This new Committee appears to be modeled on the Recovery Accountability and Transparency Board established by the American Recovery and Reinvestment Act of 2009 (ARRA), which is generally viewed as having successfully protected against the misuse of recovery funds. ... the new Pandemic Committee is created within the Inspectors General Council. This may mean that the Pandemic Committee will have a heightened degree of autonomy...."

NOT SO FAST. Fine, but...

Trump Removes Acting Pentagon IG Slated to Lead Pandemic Oversight Last week, the Council of the Inspectors General on Integrity and Efficiency tapped Fine to chair the Pandemic Response Accountability Committee, an oversight body created by the $2.2 trillion CARES Act to ensure taxpayer money is spent wisely. The law empowered CIGIE to name the committee chair, but stipulates that only current IGs can hold the position, so Trump’s removal of Fine from his acting position prevents the well-regarded watchdog from leading the oversight committee.

Over the course of his presidency, Trump has flouted transparency precedents and bristled at the role of IGs, whose work is critically important to holding agencies and the administration accountable for protecting the public’s health, among other things. Fine’s removal is part of a larger shakeup to the IG community.

Trump signaled in a signing statement on March 27 that he would not enforce some of the oversight provisions in the $2.2 trillion CARES Act. He specifically objected to the creation of a special IG for pandemic recovery at Treasury empowered to request information from other agencies and report to Congress any delays in receiving that information: “I do not understand, and my administration will not treat, this provision as permitting the SIGPR to issue reports to the Congress without the presidential supervision required by the Take Care Clause, Article II, section 3,” the statement said."

The Constitutional "authority" the President of the United States cited doesn't appear to quite fit this particular Bill which, remember, was intended "to prevent and detect fraud, waste, abuse, and mismanagement of funds." Article II, Section It says, the President "shall take Care that the Laws be faithfully executed...." Instead, the President seems more interested in taking care that no independent voice is heard, and no such Inspector seen.

The keys to deciphering solicitation consequences of "key personnel"

This post is built around the GAO protest decision in Deloitte Consulting, LLP, B-416882.4. As often warned, I make use of resources as tools to make a didactic point, even if it stretches the facts or law of the article or case. So, read the case at the link, and don't come back to me saying you were misled. I often paraphrase, reorganize, omit, insert, and generally slice and dice such resources to meet the space and objectives of this blawg. I don't try to mislead, but rely on your own judgment of the material.

The Comptroller's Decision and Digest: This is a protest challenging the agency’s evaluation of the protester’s quotation as unacceptable is denied where the agency reasonably found, consistent with the stated evaluation criteria, that one of the protester’s proposed key personnel failed to satisfy the solicitation’s minimum requirements.

The Food and Drug Administration (FDA) issued an RFQ to acquire information technology services of a very particular and special type. Deloitte offered its services. The RFQ included the following evaluation factors, in descending order of importance: technical approach, relevant experience, and price. The RFQ stated that award was to be made to the responsible vendor whose quotation represented the best value to the government, but this case turned on something else, the "technical approach" factor.

The technical approach subfactor required the submission of resumes for qualified key personnel, one of which was an enterprise solutions architect. The RFQ required that the proposed enterprise solutions architect satisfy the following minimum qualifications:

• Possesses extensive knowledge of and hands-on experience with [Oracle] Hyperion or [Oracle Business Intelligence Suite, Enterprise Edition (OBIEE)] or custom applications;
• Minimum Skills/Qualifications: At least 10 years [of] experience in Oracle Enterprise or OBIEE Oracle or Custom applications.
• Has Public Sector experience.

The agency was to evaluate the relevance of each listed key person’s experience, knowledge, certification, and identified skill sets for the ability to successfully complete the activities listed in the statement of work.

Subsequently, the agency amended the RFQ to require offerors to provide a "crosswalk", describing how general experience leads to the specific experience required in the solicitation. Offerors were specifically required to detail in which positions held by the proposed key personnel, did they obtain the required skills, qualifications, and minimum years of experience.

The proposed key person's resume in this instance explicitly stated that the proposed candidate possessed over 20 years of experience using Hyperion and Essbase, which are “core technologies of the Oracle [EPM] that [pre-date] Oracle’s 2007 acquisition of Hyperion and their subsequent rebranding of the software.” The agency didn't disagree with that assessment, but did disagree that Deloitte's proposed architect failed to detail "at least 10 years experience" with the Oracle, Hyperion and custom software required.

The agency contracting officer evaluated the material presented in support of the required experience and concluded that some of the dates listed in the detailed work history overlapped where the proposed candidate worked simultaneously for different employers. To compute the length of experience with Oracle EPM, OBIEE framework, or custom UI applications, the contracting officer eliminated duplicative periods of time for the overlapping and simultaneous employment, and only credited the total time worked with the required systems. The contracting officer’s computation showed that the proposed candidate had a total of 99 months, or 8.25 years, of relevant experience.

The agency then determined that, because the minimum 10 year experience requirement was not met. A quote that fails to conform to a material solicitation requirement is technically unacceptable and cannot form the basis for award. Qualifications for key personnel, specifically where the solicitation requires resumes for key personnel, are material requirements of a solicitation such that an offeror’s failure to propose personnel meeting those requirements would render a proposal unacceptable. The protest was denied.

This case involves the responsiveness of the offer, not the responsibility of the offeror, illustrating distinctively different and often confused fundamental procurement elements. It is not an unreasonable confusion given the way those elements are presented in laws and regulations. For instance, the ABA Model Procurement Code describes responsibility to mean a person who has the capability to perform the contract requirements and provide good faith performance. On the other hand, it defines responsive bidder to mean a person who has submitted a bid which conforms in all material respects to the invitation for bids. At first blush, both of those descriptions could describe the questions presented here. So how do I justify the assertion this case involves responsiveness not responsibility?

The key is in the language used; the artful procurement vocabulary that does not always carry the vernacular connotations of every day speech.

Look at the first sentence used in describing the matter above. It says the protest involves agency "evaluation" of the "unacceptability" of the offer. This is language used to describe responsiveness. The code, and the ABA Model Regulations, require that bids be "evaluated" based on criteria in the solicitation specifications, including criteria used to determine "acceptability". The regulations state, specifically, "any bidder's offering which does not meet the acceptability requirements shall be rejected as nonresponsive". And the nail in the coffin is the statement that qualifications for key personnel, specifically where the solicitation requires resumes for key personnel, are material requirements of a solicitation. As noted above, the definition of responsiveness rests on conformity with material respects of the bid. The language of responsiveness rests on issues of evaluation, unacceptability and materiality.


On the other hand, responsibility is not an objective evaluation of any kind based on criteria in a bid. It is a subjective judgment, based on a weighing of various "standards of responsibility", one of which is the bidder's record satisfactory performance. A determination that a bidder is, in the satisfaction of the Procurement Officer, responsible, and can be made by resort to information extrinsic to the bid submission, at any time up to award or even time of due performance. Responsibility is for practical matters presumed unless the Procurement Officer determines that the bidder is non-responsible.

It can be noted here that questions about the responsiveness or responsibility of bidders are decided at entirely different times and by entirely different standards.

Recalling, in this case, that the offeror was required to substantiate proof of experience in its submission, Cibinic and Nash, in their text, Formation of Government Contracts, Third Edition, also note the confusion that can arise between responsiveness and responsibility.

"When data or information is required to be submitted with the bid, the Comptroller will consider the purpose for which the data of information is to be used when determining whether it is a matter of responsiveness or responsibility. Thus, if descriptive data are to be used to determine a bidder's ability or capacity to perform, the matter will be one of responsibility, and failure to submit the information with the bid will not cause its rejection. (Citations mostly omitted but, noting one particular case where "failure to submit personnel resumes did not render bid nonresponsive".)  On the other hand, information or data may be required to be submitted with the bid for purposes of more precisely determining the nature of the work the bidder is agreeing to accomplish. Such data can be considered to go to the responsiveness of the bid." Id, pp 537-538. (emphasis in original)

Responsiveness, an area in which the contracting officer has limited discretion,deals with the question of whether the contractor has promised to do exactly what the Government has requested. Responsibility, however, involves the question of whether the contractor can or will perform as it has promised, and the contracting officer is accorded a great deal of discretion. Questions of responsiveness are determined only on the basis of information submitted with the bid and on the acts available at the time of bid opening. Conversely, responsibility determinations are made on the basis of information submitted or available up to the time of award. ... As a general rule, matters that deal with bidder responsibility cannot be converted into matters of responsiveness merely by inserting a provision into the IFB requiring rejection of bids that do not comply. Id, p 545. (emphasis in original)

It can be added that a similar analysis is conducted when licenses and permits are required as an element of a solicitation. See Cibinic and Nash, supra, pp 414 et seq.

Of smoke and mirrors; nonresponsibility and invisibility

This post is prompted by a November 2019 GOA report about defense procurement, specifically posing the proposition that "Ongoing DOD Fraud Risk Assessment Efforts Should Include Contractor Ownership".

In explaining why GAO did the report, it says, "DOD generally accounts for about two-thirds of federal contracting activity. Some companies doing business with DOD may have an opaque ownership structure that conceals other entities or individuals who own, control, or financially benefit from the company. Opaque ownership could be used to facilitate fraud and other unlawful activity." GAO describes "opague" in the context: opaque ownership is a structure of business form or governance that may conceal or obfuscate entities or individuals who own, control, or benefit financially from a business. (See also, e.g., in other contexts, this and this and this.)

The report recalled the impetus for the report came out of "the committee report on the National Defense Authorization Act for fiscal year 2018,[in which] the House Armed Services Committee expressed concerns that DOD contractors may disguise their identities and cost structures from procurement officers, in effect acting as hidden monopolies with unreasonable prices or establishing opaque ownership structures for benefits that are contrary to the government’s interest. The committee report included a provision that GAO examine DOD’s processes to identify contractors’ ownership structures and the risks posed to DOD by contractors with opaque ownership structures. As a general finding in this GAO report, GAO noted, "DOD has also begun a department-wide fraud risk management program, but it has neither assessed risks of contractor ownership across the department nor identified risks posed by contractor ownership as a specific area for assessment."

In undertaking the study leading to this report, GAO "reviewed GAO bid-protest decisions to identify cases in which contractors may have failed to disclose foreign ownership or concealed beneficial-owner information to obtain contracts that they were not eligible to receive"; also studying cases where there appeared "the risk that contractors could be disguising their ownership to create the appearance of competition.

Paraphrasing, GAO explains that real ownership of an entity includes the ostensible ownership disclosed to regulators and the beneficial ownership by the persons who directly or indirectly pull the levers of control and management or reap the substantial rewards of ownership of the entity. The more layers of ownership there are, the difficult it is to determine who really owns the entity. This is compounded by the observation that "In the United States, no centralized information source or national registry maintains company ownership information. In 2014, the National Association of Secretaries of State found that most states collect minimal ownership data. ... During both the entity-formation process and in annual or periodic reporting, the association found that very few states collect some form of entity ownership or control information from limited liability companies or corporations." It conceded that "the Securities and Exchange Commission collects some ownership information on publicly traded companies"; that is, the relatively few, but relatively large, businesses in the USA. The Securities and Exchange Commission collects [only] some ownership information on publicly traded companies.

This limited view from the business world has implications for procurement.

"The FAR contains several provisions governing the selection of an offeror. Provisions such as price and past performance of the offeror are generally applicable in determining which offeror should win a contract. ... A prospective contractor must affirmatively demonstrate its responsibility, including, when necessary, the responsibility of its proposed subcontractors. Contracting officers must then determine the responsibility of prospective contractors, including whether prospective contractors can perform the terms of a contract. To be determined responsible, a prospective contractor must have adequate financial resources to perform the contract (or the ability to obtain them); be able to comply with the required delivery or performance schedule; have a satisfactory performance, integrity, and ethics record; have the necessary organization, experience, accounting and operational controls, and facilities to carry out the contract (or the ability to obtain them); and be otherwise qualified and eligible to receive an award under applicable laws and regulations.

Before awarding a contract over the simplified acquisition threshold, a contracting officer must review the prospective contractor’s performance and integrity information available in the Federal Awardee Performance and Integrity Information System (FAPIIS). FAPIIS is a federal government-wide database designed to assist contracting officers with making a responsibility determination by providing integrity and performance information of covered federal agency contractors and grantees. FAPIIS provides a prospective contractor “Report Card” that includes information pertaining to the prospective contractor’s past performance (if applicable), such as any administrative agreements, contract terminations, nonresponsibility determinations, and exclusions, among other things. It also includes the ability to view the company relationship information, which details the ownership information that prospective contractors are required to report in SAM. [The System for Award Management, or SAM, is a government-wide portal that is consolidating the capabilities of multiple systems and information sources used by the Federal government in conducting acquisitions. In order to contract with the federal government businesses and agencies must complete the required registration with SAM.] When making a responsibility determination, the contracting officer must consider all the information available through FAPIIS with regard to the prospective contractor and any immediate owner, predecessor (an entity that the prospective contractor replaced by acquiring assets and carrying out affairs under a new name), or subsidiary identified for that prospective contractor in FAPIIS. The contracting officer must document in the contract file how the information in FAPIIS was considered in any responsibility determination, as well as the action that was taken as a result of the information.

There is much more to the report, and the need for knowledge about the person or entity with who the government is, or may be, engaging in business. But this post is concentrating on the responsibility factor, and that is only part of the report. I really want to encourage you to read the whole report and how entity information is critical to matters national security and the mitigation of fraud.

GAO notes that, although DOD and other agencies have taken some baby steps to shed light on the issue of contractor ownership (e.g., "DOD, GSA, and the National Aeronautics and Space Administration amended the FAR in May 2014 to require prospective contractors to self-report their immediate and highest-level entity owner, but not their beneficial owner, as part of contractors’ annual registration process in SAM), DOD "faces a number of challenges in identifying and verifying" it. Because "the scope and scale of this activity makes DOD procurement inherently susceptible to fraud", GAO recommended "The Office of the Undersecretary of Defense (Comptroller) should include an assessment of risks related to contractor ownership as part of its ongoing efforts to plan and conduct a department-wide fraud risk assessment."

Guam law follows the ABA Model Procurement Code when it comes to issues of responsibility, which is also the framework of the federal government as described above. I also has a (problematic) requirement (5 GCA § 5233) that, in some procurement methods, a bidder, "as a condition of bidding" must disclose "the name and address of any person who has held more than ten percent (10%) of the outstanding interest or shares of [a] partnership, sole proprietorship or corporation at any time during the twelve (12) month period immediately preceding submission of a bid." The "wild wild West" current darling of business entities is an LLC, but this law, written before Guam adopted an LLC law, does not make any disclosure requirement for that form of entity. Nor does it include trusts within the prophylactic disclosure requirement.

It is interesting to know that trusts have also been used to create invisibility in the procurement context. The following article discussing this issue in light of the trend described in the GAO report above.

Trust but Verify: Disclosure of Trust Ownership May Be Required for Family-Owned Government Contractors

Family-owned businesses are often owned and controlled by family trusts. Trusts are used by families for estate planning, tax planning and asset protection. Family-owned government contractors with trust ownership structures should be mindful of ownership
disclosures required by the Federal Acquisition Regulation (FAR). Failure to comply with the required disclosures could result in False Claims Act or false statement allegations, loss of Facility Security Clearances, rejections of bids and proposals, and loss of bid protests.

Under rules adopted in 2014, a government contractor or offeror owned by another entity must disclose its own Commercial and Government Entity (CAGE) code and the CAGE codes of its “immediate owner” and “highest level owner” both in the System for Award Management (SAM) and to the contracting officer before contract award. Under FAR 52.204-17 (Ownership or Control of Offeror), “immediate owners” and “highest-level owners” are required to obtain their own CAGE codes even if they will not be directly contracting with the government. “Immediate owner” means an entity, other than the offeror, that has direct control of the offeror. “Highest-level owner” means the entity that owns or controls the
immediate owner of the offeror, or that owns or controls one or more entities that control an immediate owner of the offeror. No entity owns or exercises control of the highest-level owner.

If an offeror is owned directly by individuals, the offeror does not have an “immediate owner” or a “highest-level owner.” If an offeror is directly owned by another entity, the ownership entity is the “immediate owner” of the offeror. If an offeror’s immediate owner is, in turn, owned by another entity or series of entities, the last entity at the top of the offeror’s organizational chart is the “highest-level owner.” An offeror is required to certify its ownership disclosures in the “Representations and Certifications” section of its registration on SAM.gov.

The term “entity” is not defined in the FAR, [but is described at the Commercial and Government Entity webpage: "In business, an entity is a person, department, corporation, cooperative, partnership, business, manufacturer, organization, or other groups with whom it is possible to conduct business", and a trust can fall within that description.] The Defense Logistics Agency (DLA), the agency responsible for assigning CAGE codes, suggest that trusts are considered entities under the FAR and should have their own CAGE codes and be disclosed on SAM.gov." Trusts are commonly referenced in state business entity statutes. Trusts also have certain characteristics that are similar to other business entities such as corporations and limited liability companies. Namely, trusts can buy, sell and own personal property and real property; own equity in other business entities; and enter into contracts. Trusts may also shield their beneficiaries from the claims of creditors.

The author of that article warns, "In order to avoid possible False Claims Act or false statement allegations, loss of security clearances, rejections of bids and proposals, and adverse bid protest decisions, family-owned government contractors with trust ownership structures should review their SAM.gov registration to ensure that disclosures about their “immediate owner” and “highest-level owner” are accurate."

The interests of the government, be it state, local or federal, in good governance principles of transparency and responsibility are antithetical to the interests of private sector contractors. There may be some giving and taking, but the government must always heed those principles. History has shown there are many other structures that provide the flexibility commerce requires to carry on,but government, and the broader community must stay vigilant to any "Houdini factor" that jeopardizes the foundation of principles which good governance, and good procurement, that our democratic society depends on.

How do you determine prospective contractor responsibility if you don't know who the contractor really is?

The ABA Model Procurement Code, as do most other procurement regimes, require the government to know who it is doing business with.  "It is important that the bidder of offeror will be a responsible contractor -- that the contractor has the financial ability, resources, skills, capability, and business integrity necessary to perform the contract."  (MPC 3-401, Comment 1)

"The unreasonable failure of a bidder or offeror to promptly supply information in connection with an inquiry with respect to responsibility may be grounds for a determination of nonresponsibility with respect to such bidder or offeror".  (MPC 3-401(1))

Since the time the MPC was enacted in 1979, other laws were being developed to facilitate cloaks of invisibility for entities to hide the identities of the money, ownership, assets and control of  businesses organized under such laws.  The most recent has been the promulgation of a Uniform Limited Liability Company Act (ULLCA) in 1995.  Use of LLCs to provide ownership anonymity of assets, and businesses, is easy (see "How to Hide Ownership of a Company?") and notorious (see, "Anonymous Owner, L.L.C.: Why It Has Become So Easy to Hide in the Housing Market").  The ULLCA, both in original form and in a revised 2006 Model, has been adopted on Guam and many U.S states.

This is becoming a problem, both in the U.S. and Europe, and presumably elsewhere, as indicated in the following article published by the Association of Certified Financial Crime Specialists (ACFCS):

Report roundup: EU calls U.S. a ‘secrecy haven,’ GAO highlights commercial owner opacity, and more, posted March 16, 2017.

This week’s Report Roundup has a common theme running through hundreds of pages of reports: the risk of opaque ownership structures and how, in the United States and beyond, the inability for countries to collect beneficial ownership information is a magnet for bad actors.

In the U.S., that means a major ally in the European Union (EU) calling out a longstanding gap in the country’s anti-money laundering (AML) defenses: the federal government allowing certain states like Delaware to sell corporate secrecy as a service – an ultimate irony as this country aggressively chases and chastises other jurisdictions for doing the same thing, according to the report.

That vulnerability is made doubly dangerous when it intersects the international trading sector due to the knowledge that organized criminal groups, corrupt kleptocrats and terror financiers currently hide, funnel and legitimize trillions of dollars in illicit gains, per estimates, through a myriad of trade trickery, including under and over-invoicing items, falsifying documents and other tactics.

In that same vein, U.S. government watchdog group the Government Accountability Office (GAO) noted in a report that because this country doesn’t broadly require ownership information to be made available, that can open the door to national security risks when government operations are housed in buildings owned by foreign entities who may or may not be a shell for prying, spying eyes bent on espionage.

Lastly, another report by United Nations Security Council highlighted that the issue of anonymous shell companies globally allows rogue regimes like North Korea to flout international sanctions and get access, as analysts prognosticate, to banned technology and weapons systems on its path to wreak worldwide havoc by creating weapons of mass destruction.

The article goes on to elaborate on some of those reports.

It is interesting that the article mentioned a report by the U.S. Government Accountability Office (GAO), being critical of lack of ownership information in the national security context, because the GAO has now, again, turned its eyes to the subject, in the context of procurement, in its November 2019 report below.  In its letter to Congress transmitting the report, it noted, 

DOD awards contracts to companies in the private sector to provide a wide variety of services for U.S. military forces. Of the thousands of contractors doing business with DOD, some companies are what are known as shell companies — that is, companies that exist but conduct either no business or minimal business. Shell companies can be used for legitimate purposes; for example, they may be formed to obtain financing before starting operations. However, companies sometimes use shell companies to form opaque ownership structures designed to disguise the beneficial owner — the natural person or persons who directly or indirectly own and control, or receive substantial economic benefit from, a company.

These opaque ownership structures can be used to facilitate fraud and other unlawful activity in commerce, including contracts with DOD. For this report, we define opaque ownership as structures of business governance that may conceal or obfuscate entities or individuals who own, control, or benefit financially from a business.

Ongoing DOD Fraud Risk Assessment Efforts Should Include Contractor Ownership  (some excerpts of the letter an other parts of the report, sliced and diced to meet the didactic goal and limited space of this blog; you should read the whole report for original meaning and intent):  In the letter mentioned above, it further noted:

We researched legal databases and news articles involving DOD contractors to identify federal court cases and agency decisions. We reviewed GAO bid-protest decisions to identify cases in which contractors may have failed to disclose foreign ownership or concealed beneficial-owner information to obtain contracts that they were not eligible to receive.  We examined known risks identified through our case-study research and interviews with DOD officials.  We further examined the risk that contractors could be disguising their ownership to create the appearance of competition.

We contacted several government contractors’ associations to gain members’ perspectives on reporting beneficial ownership information and received feedback from 16 members of three government contractors’ associations. The perspectives gained from our queries are not generalizable to all contractors.

In the body of the report, GAO found:  

As the number of layers of ownership increases, ownership information becomes more opaque. This opacity can make it difficult for DOD to determine which entities and individuals ultimately own or control its contractors.

In the United States, no centralized information source or national registry maintains company ownership information. In 2014, the National Association of Secretaries of State found that most states collect minimal ownership data. The association reviewed key information collected by the 50 states and the District of Columbia during the entity-formation process and in annual or periodic reports. During both the entity-formation process and in annual or periodic reporting, the association found that very few states collect some form of entity ownership or control information from limited liability companies or corporations.  The Securities and Exchange Commission collects some ownership information on publicly traded companies. Any person or group of persons that acquires beneficial ownership of more than 5 percent of a publicly traded company’s registered voting securities must register.

GSA’s System for Award Management (SAM) is a federal government-wide database for vendor data that is used across all federal agencies. Any entity that wishes to do business with the government must register in SAM to be eligible to receive a contract award, except in specific circumstances. To increase procurement transparency and traceability, entities that wish to do business with the federal government are now required to provide additional ownership information through the annual registration process in SAM. The required ownership information includes the “immediate” and “highest” level ownership of an offeror.

Responsibility Determination

Contract award decisions are based on evaluation factors and significant subfactors that are tailored to the procurement, at the discretion of procurement officials. At a minimum, these factors must include: price/cost, quality, and past performance. A prospective contractor must affirmatively demonstrate its responsibility, including, when necessary, the responsibility of its proposed subcontractors. Contracting officers must then determine the responsibility of prospective contractors, including whether prospective contractors can perform the terms of a contract. To be determined responsible, a prospective contractor must have adequate financial resources to perform the contract (or the ability to obtain them); be able to comply with the required delivery or performance schedule; have a satisfactory performance, integrity, and ethics record; have the necessary organization, experience, accounting and operational controls, and facilities to carry out the contract (or the ability to obtain them); and be otherwise qualified and eligible to receive an award under applicable laws and regulations.

Before awarding a contract over the simplified acquisition threshold, a contracting officer must review the prospective contractor’s performance and integrity information available in the Federal Awardee Performance and Integrity Information System (FAPIIS). FAPIIS is a federal government-wide database designed to assist contracting officers with making a responsibility determination by providing integrity and performance information of covered federal agency contractors and grantees. FAPIIS provides a prospective contractor “Report Card” that includes information pertaining to the prospective contractor’s past performance (if applicable), such as any administrative agreements, contract terminations, nonresponsibility determinations, and exclusions, among other things. It also includes the ability to view the company relationship information, which details the ownership information that prospective contractors are required to report in SAM. When making a responsibility determination, the contracting officer must consider all the information available through FAPIIS with regard to the prospective contractor and any immediate owner, predecessor (an entity that the prospective contractor replaced by acquiring assets and carrying out affairs under a new name), or subsidiary identified for that prospective contractor in FAPIIS. The contracting officer must document in the contract file how the information in FAPIIS was considered in any responsibility determination, as well as the action that was taken as a result of the information.

Contractors with Opaque Ownership Pose Financial Fraud Risks Including Price Inflation

Concealing relationship with subcontractor to inflate prices. Contractors can subcontract with companies they own or control to inflate prices for financial benefit. For example, in one case the contractor purchased goods from a company that its owners created, controlled, and used to make fraudulent markups appear legitimate. Contractors or subcontractors can also bill for work not performed by creating fictitious invoices that add costs to a contract. For example, in four court cases we examined, multiple DOD subcontractors were actually shell companies that did not have the inventory they purported to ultimately provide to the government or perform the work indicated in the contract requirements. Contractors or subcontractors can conceal conflicts of interest for financial benefits. For instance, in one case a DOD contractor employee and his spouse formed a company and concealed their interests by not listing their names but listing the names of family members on formation documents. This company became a subcontractor to the company that employed the DOD contractor. The contractor employee, in his official position, wrote letters justifying awards of purchase orders to the subcontractor he owned and approving recommendations that the awards be made to the subcontractor. The co-owner of the subcontractor concealed her involvement by signing contracts using a different name. We also identified the potential risk of companies creating the appearance of competition by submitting bids from fictitious companies. We identified one case that involved a DOD contractor whose executives admitted as part of their plea agreements to creating fictitious, inflated bids that were not from actual businesses to ensure that the contractor’s own bid would be selected by DOD as the supposed lowest.

Contractors with Opaque Ownership Can Also Pose Nonfinancial Fraud Risks

Contractors can pose nonfinancial fraud risks to DOD by concealing their ownership structure to bid on and obtain contracts that they are not eligible to receive. These nonfinancial risks may not pose a direct financial cost to DOD, but they can allow ineligible companies to contract with DOD while potentially denying eligible companies from contracting with DOD. These risks can also lead to additional vulnerabilities. One contractor that fraudulently obtained set-aside contracts claimed it was owned by a service-disabled veteran; however, that veteran had virtually no involvement with the contractor. Some contractors have been found not eligible to receive the set-aside contracts because they were not at least 51 percent controlled by the eligible individuals and the eligible individuals did not make long-term decisions for the companies. Rather, the contractors were controlled by an ineligible individual who owned and controlled a separate company that actually performed work on the set-aside contracts.

Contractors with opaque ownership structures can also pose the risk of circumventing eligibility requirements for contracts that are only designated for domestic companies, which can lead to other vulnerabilities that affect warfighter readiness. We identified four cases in which individuals created domestic shell companies for foreign manufacturers and bid on contracts designated for domestic companies. In three of the four cases, the individuals behind the shell companies also had ownership interests in the foreign manufacturing companies. Foreign manufacturers received payments from the contracts, despite the contracts only allowing domestic manufacturers to be eligible, and one such manufacturer ultimately supplied DOD with defective and nonconforming parts that led to the grounding of at least 47 fighter aircraft.

I'm sure you get the drift here. There's much more in the GAO report, much more. Have a look. Of particular importance is the lengthy discussion of things that are needed to improve the system of contractor selection. In brief, in its conclusions, the report summarizes,

We recognize that collecting additional ownership information, including beneficial-ownership information, could pose compliance burdens for contractors; and regulatory trends have generally focused on easing the burden to do business. Additionally, verifying contractor ownership can be challenging and time-consuming. Nevertheless, having a thorough assessment of contractor-ownership risks will better position DOD to make informed decisions on how best to use its resources and help ensure that the department’s fraud risk management program is organized and targeted to manage risks in a prioritized manner.

POST SCRIPT: In another new development along the lines of tracking who is whom, note the following article reprinted in Lexology:

Government Contractors Beware: DOJ Announces Creation of Interagency Procurement Collusion Strike Force

On November 5th, the Department of Justice (“DOJ”) Antitrust Division doubled down and announced the formal launch of the Procurement Collusion Strike Force (“PCSF”), an interagency partnership consisting of prosecutors and investigators focused on deterring, detecting, investigating, and prosecuting antitrust crimes, such as bid-rigging conspiracies and related fraudulent schemes in government procurement, grant, and program funding.

Unilaterial termination of government contract: fettered or convenient?

There is, in this post, a bit of a red herring. I will be comparing failures of a government to perform an admitted contract, and the effect of the contract obligation on the validity of the contracted obligation. Actually, the compared situtations are distinguishable on their facts, but the common notion is one of governance issues one necessarily encounters when contracting with a government. Thus, this is more a case of contrasts, not comparisons at a certain level, but a teachable moment nevertheless (I hope).

Note that I regularly, with no disrespect intended, slice and dice, reorganize, paraphrase, leave out critical facts and citations, and generally make a mess of the original source to fit the available space and the point to be made in a post. So, always, always, go to the source; read the original at the link and don't get misled by my wayward rendition.

The impetus of this post is the Australian appellate case captioned Searle v Commonwealth of Australia [2019] NSWCA 127, decided May 31, 2019. A good nutshell discussion of the case is provided by Dr Nick Seddon, an honorary professor at the Australia National University College of Law, on the Australian Public Law blog. Dr Seddon is an accomplished leading authority, and author, on Australian commercial and government contract law. Critically for this blog writer, he writes in a forthright and narrative style that is easy to read and grasp.

Searle v Commonwealth [2019] NSWCA 127 – government contracting and fettering

What happened in Searle?    Searle joined the Navy as a marine technician. After being signed up, he entered into a training contract under which he would undertake a course of training towards a Certificate IV in Engineering. Under it the Navy undertook to provide a training plan and the various components to achieve the Certificate. The Navy failed to provide these elements of training. After leaving the Navy, Searle sued for damages for breach of contract. He argued that, if he had achieved the Certificate, he could have obtained a more remunerative job in civilian life than he in fact got.

There is a special legal background to this story. Going back to medieval times, English law held that the Crown does not enter into contracts with its servants. This applies in Australia although, for the ordinary public service, it has been superseded by elaborate legislation. Not so for the military, or at least not so as to remove the basic proposition that there is no contract between an service member and the Commonwealth. Such members are engaged at her Majesty’s pleasure.

The fettering rule.   When government enters into a contract, there is always a potential tension. To what extent does the contract bind the government in a way that may thwart the government’s task of governing? The answer to this traditionally has been that freedom to govern trumps freedom of contract. Under various labels (executive necessity, the rule against fettering or, more vaguely, sovereign risk) the government must be free to implement its programs and policies even if this causes the government to be in breach of contract. Traditionally, that is too bad for the contractor with no right to a remedy. This collection of principles has generated much controversy over many years, though it arises rarely. The controversy is fully described by Bell P, the lead New South Wales Court of Appeal judge in Searle v Commonwealth.

This tension is captured in a number of propositions (stated starkly here):
1. The government may simply break a contract with impunity;
2. The government cannot contract out of, or relieve the contractor from, existing statutory obligations;
3. The government cannot through a contract fetter its future exercise of executive power;
4. The government cannot through contract commit to future legislation;
5. The government may instigate legislation to override an existing contract.
Propositions 2 and 4 are less controversial and are well-established. Propositions 1 and 3 are controversial and ill-defined. Proposition 5 is well-established but controversial.

The no-fettering argument in Searle:   The Commonwealth said that the basic employment arrangement was not contract but, instead, an exercise of the Crown’s prerogative (or executive) power. Even if the training contract was a separate arrangement, over and above the underlying employment arrangement, the training contract could not fetter the Navy’s prerogative right to direct, control and manage Searle as a military person (dubbed “Navy Command” in the Court of Appeal). This was therefore a proposition 3 (the training contract could not fetter the exercise of Navy Command), or possibly a proposition 1 (the Commonwealth could simply break the training contract with impunity), case. This argument succeeded before the trial Judge.

Appeal:   On appeal, the New South Wales Court of Appeal (the functional equivalent to a Supreme Court in many U.S. jurisdictions) took this opportunity to examine the long-standing controversy about propositions 1 and 3, described as “uncertain” and “ill-defined”. The lead judgment by Bell P was supported by short judgments from Bathurst CJ and Basten JA. It was held that the training contract did not amount to a fetter on the Commonwealth’s executive (or prerogative) power of Naval Command and that the Commonwealth was liable to pay damages.

Space does not allow coverage of the very thorough description and analysis by Bell P of the difficulties and criticisms of the fettering doctrine. Making a government contract almost invariably employs the executive power. The fettering rule says that that contract is void if it purports to dictate or control a future exercise of executive power, including making another contract. If this is correct, it is a public law intrusion on contracting.

The Mason solution:   The consequence of invoking the fettering rule -- the contract that offends the rule is void -- has been one of the strands of criticism of the rule. Voidness is usually chaotic. Many years after the contract is made, a court pulls the rug leaving the parties in a very uncertain position. An important solution to this problem was suggested by way of obiter dicta by Mason J in Ansett Transport Industries (Operations) Pty Ltd v Commonwealth (1977) 139 CLR 54 at 76. This was that the contract is not void but it could not be enforced by coercive orders such as an injunction of specific performance. But, on the other hand, it could be the subject of a damages remedy. This solution preserves the underlying rationale of the fettering doctrine and, at the same time, protects the contractor. It is clear that the denial of the equitable remedies of injunction or specific performance is because of the government’s imperative to be unhindered in its task of implementing its policies and programs -- not for one of the reasons that guides a court’s discretion under the ordinary law of contract.

The training contract:    In Searle the contest was between the training contract and the future exercise of the power of Naval Command. Absent a possible fettering argument, there was no basis for challenging the contract. At a factual level, the training contract simply did not fetter the power of Naval Command. Any resort to Naval Command that detracted from the obligations arising from the training contract did not fetter the Commonwealth in any real sense. Even the possibility of having to pay damages in accordance with the Mason solution would not amount to a practical fetter. The Commonwealth conceded that it had the power to enter into such a contract and did not attempt to argue that it lacked that power, absent a fettering argument.

President Bell, during the course of his wide-ranging examination of the academic and judicial criticisms of the fettering doctrine, was clearly motivated by the fundamental principle that contracts should be kept, not just for the sake of the contractor but also from the perspective of government, because otherwise it would not be a credible commercial player. "This approach is more nuanced than others which carry the crude, often overbroad and instinctively unfair consequence of a contract being treated as void. It is an approach which arguably best reconciles the competing policy considerations."

Conclusion:   This case “raises a number of very important questions of principle” about government contracting, albeit in an area of the law that is rarely litigated. The fettering doctrine, at least arising from propositions 1 and 3, has been festering over many years and is in need of a fresh look and restatement. The Mason solution has been applied for the first time in Australia by the New South Wales Court of Appeal. It strikes a sensible balance between the government’s imperative to govern and its need to make contracts.

Watch this space for a possible appeal to the High Court.

In the U.S., the private law of contract has been undermined and supplanted by statutory laws applicable to government acquisition contracts. In the typical "procurement" government contract, the government is acquiring something. "“Acquisition” means the acquiring by contract with appropriated funds of supplies or services (including construction) by and for the use of the Federal Government through purchase or lease.... Acquisition begins at the point when agency needs are established and includes the description of requirements to satisfy agency needs, solicitation and selection of sources, award of contracts, contract financing, contract performance, contract administration, and those technical and management functions directly related to the process of fulfilling agency needs by contract. 2 FAR 2.101(a) In the Searle case, the government was acquiring nothing.

There was nothing more than an arrangement between the government and an employee that the government would provide a service for an employee. It was something in the nature of, what the U.S. Supreme Court has styled, a "gratuity": "Pensions, compensation allowances and privileges are gratuities. They involve no agreement of parties; and the grant of them creates no vested right. The benefits conferred by gratuities may be redistributed or withdrawn at any time in the discretion of Congress. ... On the other hand War Risk policies, being contracts, are property and create vested rights. The terms of these contracts are to be found in part in the policy, in part in the statutes under which they are issued and the regulations promulgated thereunder." Lynch v. United States, 292 US 571,577, U.S. Supreme Court (1934)

I'm not sure if that is a difference with a distinction between the fettering rules for government contract as practiced in Australia and contract clauses available in U.S. government, and Guam, contracting regulations, but by definition, Searle did not deal with a government contract as we know in procurement. "“Contract” means a mutually binding legal relationship obligating the seller to furnish the supplies or services (including construction) and the buyer to pay for them. It includes all types of commitments that obligate the Government to an expenditure of appropriated funds and that, except as otherwise authorized, are in writing. In addition to bilateral instruments, contracts include (but are not limited to) awards and notices of awards; job orders or task letters issued under basic ordering agreements; letter contracts; orders, such as purchase orders, under which the contract becomes effective by written acceptance or performance; and bilateral contract modifications. Contracts do not include grants and cooperative agreements ...." 2 FAR 2.101(a)

Guam's procurement law would not provide jurisdiction for a court to hear the contract claim brought by Searle, because the Guam procurement law does not waive sovereign immunity involving government contracts that are not acquisitions. In Guam, the government has waived sovereignty to be sued under government contracts more generally, but under the Claims Act, and, similar to Searle, the Claims Act only has jurisdiction to render judgement for monetary awards related to expenses incurred "upon a contract", not other monetary damages and it is an open question whether it even applies to to oral or un-written contracts, or to any theories of recovery based in equity, contracts implied in law, quasi-contract, or quantum meruit. The Guam Supreme Court has left to "another day our answer to whether the Guam Legislature has extended the waiver of sovereign immunity to oral or unwritten contracts, or to any theories of recovery based in equity." Guam Police Department v. Superior Court (Lujan) 2011 Guam 8, ftnt 8.

But, to the extent that the authority of the executive branch of the government in the U.S. is impinged upon by the procurement contracting process, the U.S. government and most if not all other jurisdictions in the USA have obtained a bit of flexibility unavailable in private contract law to cope with matters of good public governance, resulting in similar outcomes as in Searle yeilding a sensible balance between the government’s imperative to govern and its need to make contracts, in reliance on the immunity of the 'crown', particular laws and regulations, and the contract between the parties, all in concert, when a void contract is to be avoided.

An example of this is the accepted "Termination for Convenience" clause, which in private law of contracts would normally render the entire contract void as an illusory "bargain". It allows the government to unilaterally terminate a contract for practically any reason short of bad faith or fraud. However, it also requires that the government to compensate the contractor for work done and profits earned to the date of termination. It thus reached a similar outcome as in the Searle case. The termination for convenience clause arose out of the experiences of war, in particular the armistice following hostilities (in the "good old" days of wars between established states), when peace suddenly broke out but war material contracts persisted, without the government's need for more war materiel -- indeed as an impediment to redirecting funds to meet the needs of rebuilding the country.

Another example is the standard contract disputes clause. In simple terms, this clause and implementing regulations provides that contract disputes between the government and a contractor will be decided by the government if the parties are unable to "mutually agree" on a settlement and resolution of the dispute. In the face of this somewhat illusory and certainly conflicted decision making process, the clause contemplates a review of the government's decision, administratively, judicially or both.

This discussion illustrates a point I make when people tell me that government contracting should be done in the same manner as private contracting: government contracting must be conducted with an eye to good public governance as the overriding principle on which the contracting is allowed. It is true that "when the United States enters into contract relations, its rights and duties therein are governed generally by the law applicable to contracts between private individuals". Lynch v. United States, supra, 579, U.S. Supreme Court (1934) Nevertheless, only Congress can determine to allow a cause of action against the government arising under that contract. "The character of the cause of action — the fact that it is in contract as distinguished from tort — may be important in determining (as under the Tucker Act) whether consent to sue was given." Id., at 582 "Specifically, the Tucker Act permits three kinds of claims against the government: (1) contractual claims, (2) noncontractual claims where the plaintiff seeks the return of money paid to the government and (3) noncontractual claims where the plaintiff asserts that he is entitled to payment by the government."

American jurisdictions tend to mitigate the "fettering tensions" discussed above by Dr Seddon with a combination of regulations and contract clauses, coupled with particular waivers of sovereign immunity. And they each, in their separate ways, look for that nuance which strikes a sensible balance between the government’s imperative to govern and its need to make contracts.