Industry braces for bigger crackdown on corruption.

• Author: Erwin, Sandra I.
• Position: DEFENSE WATCH

A deteriorating relationship between government and contractors may be about to hit rock bottom.

Amid a general climate of distrust--exacerbated by a slew of high-profile procurement fraud cases in recent years--federal regulators recently introduced new anticorruption rules that lawyers inside the Beltway have characterized as unprecedented in their scope and power.

As of Dec. 12, all government contractors regardless of size are required on penalty of suspension or debarment to disclose to their federal customers in a timely fashion any credible evidence of improper conduct by any of the company's employees. This includes illegal gratuities, kickbacks, conflicts of interest or failure to notify the government of an overpayment. In the past, contractors only were expected to make "voluntary" disclosures of misconduct. But the Department of Justice argued that the previous policy did not go far enough and asked the Federal Acquisition Regulatory Council to modify the rule to make disclosures mandatory.

For most contractors whose livelihood depends on federal dollars, the punishment for failing to divulge evidence of wrongdoing is the equivalent of the death penalty.

The new rule has generated mixed reviews from the legal community. Some experts believe these are necessary measures to prevent wrongdoing, particularly in defense and military contracting where most federal discretionary spending occurs. They view it as a continuation of an aggressive push by Justice that began two years ago with the creation of a National Procurement Fraud Task Force. The task force is credited for having prosecuted more than 300 procurement fraud cases that have resulted in convictions, charges, civil actions or settlements. At least 50 individuals have been criminally charged with procurement fraud associated with war contracts in Iraq, Afghanistan and Kuwait.

But some attorneys worry that the government may be opening a Pandora's box. By requiring companies to become de facto government informants, the new measures may create legal "gray areas" that could lead to massive litigation down the road. If companies are expected to disclose their own ethical breaches, they could be denying themselves the right to a legal defense. The mandatory disclosure regime also puts too much guesswork into the system, some lawyers contend. Company executives will be expected to turn in their own employees for suspected crimes even if they are not sure whether the act was...