The Impact of Criminal Conviction on Public Sector Contractors and Grantees

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MPACT OF

RIMINAL

ONVICTION ON

UBLIC

ECTOR

ONTRACTORS AND

RANTEES

Janet Levine

Peter Eyre

M. Yuan Zhou

Crowell & Moring LLP

NTRODUCTION

A criminal conviction can lead to a wide variety of collateral consequences for companies and

individuals that receive government contracts, grants, as well as other forms of government

assistance. What follows is a summary of some of the most notable consequences and

considerations that flow from a criminal conviction. We also offer some observations for

addressing these collateral consequences most effectively.

EDERAL

USPENSION AND

EBARMENT

VERVIEW

The federal government only awards contracts and grants to companies and individuals that are

“presently responsible.” To enforce this policy, the federal government suspends or debars

companies and individuals that it determines are not presently responsible. Suspension and

debarment can be initiated and imposed for a wide range of reasons, such as in the wake of a

criminal conviction. But, under each cause for suspension or debarment, the common theme is

that the company has acted (or failed to act) in a way that leads the government to question its

integrity, ethics, and compliance.

A suspension is an exclusion from participating in federally funded programs pending the

completion of an investigation or legal proceedings. Debarment is an exclusion from

participating in federally funded programs for a definite period of time, typically three (3) years.

A suspension or debarment by any federal agency is effective throughout all federal agencies,

regardless of whether the suspension and debarment is initiated under the procurement or non-

procurement regulations. That is, a company excluded from participating in federal procurement

programs is also excluded from participating in federal grant programs.

In order to suspend a company, the government must have “adequate evidence” to justify the

suspension. To debar a company, the government must have a “preponderance” of evidence to

support the debarment. Under the procurement regulations, a company that is proposed for

debarment is automatically suspended while debarment proceedings occur. In practice, at least

under the procurement regulations, there is little difference in the immediate effect of a

suspension, a proposed debarment, or a debarment. When a company is suspended, proposed for

debarment, or debarred, the names and addresses of suspended, proposed for debarment, or

debarred companies immediately are listed as ineligible on the System for Award Management

(“SAM”) maintained by the General Services Administration. Listed companies are excluded

from receiving federally funded contracts and grants.

Statistically, the federal government has become increasingly aggressive in imposing suspension

and debarment. Further, increased coordination among suspension and debarment officials and

the Department of Justice and the Inspectors General make it more likely that information on

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criminal proceedings and investigations will be shared with the suspension and debarment

community.

EAD

GENCY

ROCESS AND

ACTORS

SED TO

ETERMINE IF

USPENSION AND

EBARMENT IS

ARRANTED

Because suspensions and debarments are effective government-wide, when more than one

agency has an interest in the suspension or debarment of a company, a lead agency is designated

to coordinate a resolution among all interested federal agencies. One agency is deemed the lead

agency and will make the ultimate decision regarding what suspension and debarment action, if

any, is necessary on behalf of the entire government. Typically, in Crowell & Moring’s

experience, the lead agency is often the agency whose mission is most closely impacted by the

alleged wrongdoing or an agency that does significant business with that company.

When evaluating whether to impose or lift a suspension or debarment, suspension and debarment

officials consider the factors set forth in the applicable regulations to determine whether the

alleged misconduct warrants suspension and debarment. For suspension and debarment under

federal procurement regulations, the federal agency considers ten mitigating factors when

determining whether to initiate debarment proceedings, which are included as Attachment A.

For suspension and debarment under non-procurement programs, such as federal grant programs,

the government considers both mitigating and aggravating factors when determining whether to

initiate debarment proceedings, which are included as Attachment B.

ANDATORY

USPENSION AND

EBARMENT

Convictions under certain criminal statutes lead to mandatory debarment. For example, the

Clean Air Act and Clean Water Act contain mandatory debarment provisions if there is a

conviction.

The U.S. Environmental Protection Agency (“EPA”) automatically debars the

facility/location involved in the wrongdoing (meaning it cannot be involved in contracts or

programs with direct or indirect federal funds). Most often that is the site of the misconduct.

But in certain cases, corporate headquarters is viewed as the site of the misconduct, particularly

in cases where the factual underpinnings suggest willful blindness or organizational recklessness.

Following automatic debarment, a company can seek reinstatement by petitioning the EPA

Suspension and Debarment Official (“SDO”) and demonstrating that steps have been taken to

correct the situation that allowed the misconduct to occur. In Crowell & Moring’s experience, if

the company engages proactively with the EPA SDO (and the cognizant district office), it is

possible to negotiate an administrative agreement that resolves the automatic debarment once the

plea is entered.

The following table highlights other examples of statutes that contain mandatory debarment

provisions if there has been a statutory violation:

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Statute Cause of Debarment

Duration and

Scope

Buy American Act (41

U.S.C. § 8303)

Violations of the Buy American

Act in constructing, altering or

repairing any public building or

work in the United States using

appropriated funds.

3 years;

government-wide

Drug-Free Workplace

Act (41 U.S.C. § 8102)

Violations of the Act as shown by

repeated failures to comply with

its requirements, or employing

numerous individuals convicted

of criminal drug violations.

Up to 5 years;

government-wide

Service Contract

Act (41 U.S.C. § 6706)

Failure to pay compensation due

to employees under the Act.

3 years;

government-wide

ISCRETIONARY

USPENSION AND

EBARMENT

In addition to mandatory exclusions, SDOs have discretionary suspension and debarment

authority. SDOs have wide-ranging authority to suspend/debar entities and individuals that lack

business integrity and ethics. The discretionary authority is not tethered to the particular facility

or corporate entity, nor is it tied to the factual recitations in a conviction or indictment. It is quite

common for a plea, civil complaint, or criminal indictment to trigger a discretionary action by an

SDO, particularly if the factual recitations indicate suggest fraudulent conduct or a lack of

business integrity and ethics. When SDOs exercise discretionary authority, they may choose to

enter into administrative compliance agreements to resolve suspension and debarment

proceedings.

TATE

USPENSION AND

EBARMENT

Many state and local governments refuse to award funds to entities that are ineligible to receive

federal funds, and many states have the practice of initiating debarment proceedings against

companies that are debarred by the federal government. While certain states such as Maryland

and New Jersey may debar a contractor that has been federally debarred,

others mandate the

simultaneous debarment of a federally debarred contractor. For example, Massachusetts requires

that a contractor debarred or suspended by any agency of the United States be simultaneously

debarred or suspended, unless “special circumstances exist.”

NTERNATIONAL

USPENSION AND

EBARMENT

Other countries may also initiate suspension and debarment proceedings or refuse to award

contracts to a company that is suspended or debarred in the United States, or that is convicted of

certain crimes in the United States. Examples include the following:

• Canadian public sector opportunities generally require offerors to certify if it, or any of

its affiliates, have been convicted of or pled guilty to certain violations of Canadian law

(including fraud), or any similar foreign offenses. Canada may not award contracts to

entities if they, or their affiliates, have been convicted of certain offenses in violation of

Canadian law, or convicted of similar foreign offenses.

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• The Brazilian government can debar companies for, among other offenses, “intentional

commission of any illegal act that reveals a contractor’s improbity to contract with the

Government.” In Brazil, if a company is debarred at the federal level, the company is

also automatically debarred at the state and local levels.

• Australian procurement policy prohibits the federal Australian government from “seeking

to benefit from supplier practices that may be dishonest, unethical, or unsafe…” and its

debarment regime is discretionary.

• UK contracting authorities must exclude an economic operator from participating in a

procurement procedure if that operator has been convicted of organized crime,

corruption, bribery, fraud, money laundering, drug trafficking or terrorism. Operators

may be excluded from a procurement procedure for reasons such grave professional

misconduct, violation of environmental, social or labor laws, persistent deficiencies in

past performance of public contracts, or misrepresentation and the supply of misleading

information to the contracting authority.

RESUMPTIVE

XCLUSION

EQUIRED BY

EDERAL

PPROPRIATIONS

TATUTES

Federal appropriations statutes prohibit certain federal agencies from using appropriated funds to

enter into a contract or grant with a corporation that is convicted of a felony criminal violation of

federal law within the two years preceding the award, unless the agency determines that such

exclusion is not necessary:

None of the funds made available by this or any other Act may be used to enter

into a contract, memorandum of understanding, or cooperative agreement with,

make a grant to, or provide a loan or loan guarantee to, any corporation that was

convicted of a felony criminal violation under any Federal law within the

preceding 24 months, where the awarding agency is aware of the conviction,

unless a Federal agency has considered suspension or debarment of the

corporation and has made a determination that this further action is not necessary

to protect the interests of the Government.

See Consolidated Appropriations Act, 2016 (P.L. 114-113), Division E, Financial Services and

General Government Appropriations Act, 2016, § 746 (hereinafter “2016 Appropriations Act”).

For FY 2016, the prohibition applies government-wide for appropriated funds under the 2016

Appropriations Act.

While the appropriations prohibition seemingly applies “where the awarding agency is aware of

the conviction,” agencies now must consider criminal convictions when awarding contracts

pursuant to FAR 52.209-7, “Information Regarding Responsibility Matters” and FAR 52.209-5

“Certification Regarding Responsibility Matters.” These clauses require certain vendors

submitting proposals for federal contracts to report or certify to information pertaining to

criminal proceedings and convictions. In addition, on December 4, 2015, the FAR Council

issued an interim rule – with an effective date of February 26, 2016 – that requires a corporation

responding to any federal solicitation to represent whether it (1) has a felony conviction for a

violation under any federal law within the preceding 24 months or (2) has any unpaid federal tax

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liability that has been assessed and is not being appealed or paid in a timely manner. Consistent

with the Consolidated and Further Continuing Appropriation Acts, any affirmative response

made by a corporation to either representation would effectively create an automatic exclusion

that precludes award of federal contracts.

If a company is convicted of a felony under federal criminal law (for these purposes a plea leads

to a conviction), that specific corporate entity cannot be awarded federal contracts or grants

using appropriated funds subject to this prohibition until each individual agency awarding funds

has made an affirmative determination that suspension or debarment is not necessary to protect

the government’s interest. Notably, the lead agency process does not apply in this context.

In other words, companies in this situation must engage with numerous agencies to continue to

receive funds subject to the prohibition. Even if one agency favorably resolves a suspension and

debarment issue in favor the contractor, and determines that suspension and debarment is not

necessary to protect the government’s interest, that agency’s decision is not binding on other

federal agencies. Although certain agencies may defer to a favorable resolution, other agencies

will conduct their own inquiry and make their own determination.

TATUTORILY

ANDATED

EBARMENT OF

NDIVIDUALS

There are notable statutory provisions that provide for the mandatory debarment of individuals.

As an example, Section 2408 of Title 10 of the United States Code places a five-year ban on

persons who have been convicted of fraud or any other felony arising out of a contract with the

Department of Defense (“DoD”) from working in management or supervisory capacities on any

DoD contract, or engaging in similar activities. Contractors who knowingly employ such

“prohibited persons” are themselves subject to criminal penalties.

MPACT OF

ONVICTION ON

ESPONSIBILITY

ETERMINATIONS

In addition to the government’s suspension and debarment regime, a criminal conviction may

also impact a contractor’s responsibility determination (and, therefore, whether or not it can

receive government contracts). As part of any source selection for government contracts, the

awarding entity must consider whether or not a contractor is presently responsible. To that end,

the contracting officer must weigh the information required under FAR 52.209-5 “Certification

Regarding Responsibility Matters,” which requires a “check-the-box” response on whether or not

the contracting entity or its principals have been convicted of a number of criminal offenses,

including embezzlement, theft, and false statements, among others. If a contractor affirmatively

certifies to a criminal conviction, the contracting officer must weigh that certification, which

could be an impediment to contract award.

In addition to the certification required by FAR 52.209-5, the Federal Awardee Performance and

Integrity Information System (“FAPIIS”) further enhances the government’s ability to make

responsibility determinations by evaluating the business ethics and performance of prospective

contractors competing for federal business. FAPIIS is a broad system that aggregates

information from existing sources and collects new categories of information. It contains

contractor self-reporting of criminal convictions, civil liability, and adverse administrative

actions, and also includes contracting officers’ non-responsibility determinations, contract

terminations for default or cause, and administrative agreements entered into by suspension and

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debarment officials to resolve a suspension or debarment, among other information. Contracting

Officers must review the information in FAPIIS to make a responsibility determination.

DDITIONAL

OLLATERAL

ONSEQUENCES OF

ONVICTION

Not only are excluded entities prohibited from being awarded federal contracts or grants by any

agency, they may also suffer the loss of security clearances, the inability to obtain export

licenses, and possible restrictions on the ability to win state and local government contracts.

In addition to exclusion, a criminal conviction can lead to a variety of other collateral

consequences. It could hamper the company’s ability to establish or maintain lines of credit,

lead to increased scrutiny from public auditors, and the reputational damage can significantly

affect commercial sales and stock value. A criminal conviction may also damage contractor’s

past performance rating, an evaluation factor in most procurements, which would risk its ability

to win future government contracts.

ROACTIVELY

ITIGATING THE

ISK OF

OLLATERAL

ONSEQUENCES

Given the devastating collateral consequences of a criminal conviction, companies that find

themselves in trouble can/should proactively manage the administrative risks from the outset of

any criminal investigation or enforcement action. While many of the collateral consequences of

criminal conviction can be managed reactively post-conviction, those consequences – such as

suspension and debarment – can often be best mitigated pre-conviction, or in the process of

resolution. It is important for the government contracts and suspension/debarment strategy to be

integrated into the overall strategy for the matter. The company should have the right pieces in

place so that it can proactively engage with the cognizant suspension and debarment officials

(ideally well before an indictment, plea, settlement, or complaint becomes public).

Most often, the scope and period of debarment can be reduced or eliminated if companies have

engaged early and started to preview why the company is presently responsible. For example, it

is often best for the company to reach out to suspension and debarment officials before a plea is

finalized, with the goal of negotiating resolutions and securing favorable responsibility

determinations in advance. In other words, the impact of the statutory preclusion can be

mitigated (and, in some cases, avoided altogether) through careful planning, decisive action by

the company, and proactive communication.

Conversely, failure to engage early with the suspension and debarment officials increases the

likelihood that debarment will impact a wider swath of the company and will make it much

harder to resolve the suspension and debarment. Suspension and debarment officials expect

companies to provide detailed information about the key facts and what steps the company is

taking to address the issues prospectively. This will involve work with the entity or individual on

remediation efforts and corrective action activities.

* * *

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Attachment A

Procurement Mitigating Factors

FAR 9.406-1(a)(1)-(10)

(1) Whether the contractor had effective standards of conduct and internal control systems in

place at the time of the activity which constitutes cause for debarment or had adopted such

procedures prior to any Government investigation of the activity cited as a cause for debarment.

(2) Whether the contractor brought the activity cited as a cause for debarment to the attention of

the appropriate Government agency in a timely manner.

(3) Whether the contractor has fully investigated the circumstances surrounding the cause for

debarment and, if so, made the result of the investigation available to the debarring official.

(4) Whether the contractor cooperated fully with Government agencies during the investigation

and any court or administrative action.

(5) Whether the contractor has paid or has agreed to pay all criminal, civil, and administrative

liability for the improper activity, including any investigative or administrative costs incurred by

the Government, and has made or agreed to make full restitution.

(6) Whether the contractor has taken appropriate disciplinary action against the individuals

responsible for the activity which constitutes cause for debarment.

(7) Whether the contractor has implemented or agreed to implement remedial measures,

including any identified by the Government.

(8) Whether the contractor has instituted or agreed to institute new or revised review and control

procedures and ethics training programs.

(9) Whether the contractor has had adequate time to eliminate the circumstances within the

contractor’s organization that led to the cause for debarment.

(10) Whether the contractor’s management recognizes and understands the seriousness of the

misconduct giving rise to the cause for debarment and has implemented programs to prevent

recurrence.

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Attachment B

Non-Procurement Mitigating and Aggravating Factors

2 C.FR. § 180.860

(a) The actual or potential harm or impact that results or may result from the wrongdoing.

(b) The frequency of incidents and/or duration of the wrongdoing.

found by another Federal agency or a State agency to have engaged in wrongdoing similar to that

found in the debarment action, the existence of this fact may be used by the debarring official in

determining that you have a pattern or prior history of wrongdoing.

(d) Whether you are or have been excluded or disqualified by an agency of the Federal

Government or have not been allowed to participate in State or local contracts or assistance

agreements on a basis of conduct similar to one or more of the causes for debarment specified in

this part.

(e) Whether you have entered into an administrative agreement with a Federal agency or a State

or local government that is not governmentwide but is based on conduct similar to one or more

of the causes for debarment specified in this part.

(f) Whether and to what extent you planned, initiated, or carried out the wrongdoing.

(g) Whether you have accepted responsibility for the wrongdoing and recognize the seriousness

of the misconduct that led to the cause for debarment.

(h) Whether you have paid or agreed to pay all criminal, civil and administrative liabilities for

the improper activity, including any investigative or administrative costs incurred by the

government, and have made or agreed to make full restitution.

(i) Whether you have cooperated fully with the government agencies during the investigation and

any court or administrative action. In determining the extent of cooperation, the debarring

official may consider when the cooperation began and whether you disclosed all pertinent

information known to you.

(j) Whether the wrongdoing was pervasive within your organization.

(k) The kind of positions held by the individuals involved in the wrongdoing.

(l) Whether your organization took appropriate corrective action or remedial measures, such as

establishing ethics training and implementing programs to prevent recurrence.

(m) Whether your principals tolerated the offense.

(n) Whether you brought the activity cited as a basis for the debarment to the attention of the

appropriate government agency in a timely manner.

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(o) Whether you have fully investigated the circumstances surrounding the cause for debarment

and, if so, made the result of the investigation available to the debarring official.

(p) Whether you had effective standards of conduct and internal control systems in place at the

time the questioned conduct occurred.

(q) Whether you have taken appropriate disciplinary action against the individuals responsible

for the activity which constitutes the cause for debarment.

(r) Whether you have had adequate time to eliminate the circumstances within your organization

that led to the cause for the debarment.

(s) Other factors that are appropriate to the circumstances of a particular case.

Janet Levine is a partner in the Los Angeles office of Crowell & Moring LLP and is a member

of the firm’s White Collar and Regulatory Enforcement practice group. Peter Eyre is a partner

and Yuan Zhou is an associate in the Washington, D.C. office of Crowell & Moring LLP and are

members of the firm’s Government Contracts practice group.

See Clean Air Act (42 U.S.C. § 7606) (“No Federal agency may enter into any contract with

any person who is convicted of any offense under section 7413(c) of this title for the

procurement of goods, materials, and services to perform such contract at any facility at which

the violation which gave rise to such conviction occurred if such facility is owned, leased, or

supervised by such person. The prohibition in the preceding sentence shall continue until the

Administrator certifies that the condition giving rise to such a conviction has been corrected.”);

see also Clean Water Act (33 U.S.C. § 1368) (“No Federal agency may enter into any contract

with any person, who has been convicted of any offense under section 1319(c) of this title, for

the procurement of goods, materials, and services if such contract is to be performed at any

facility at which the violation which gave rise to such conviction occurred, and if such facility is

owned, leased, or supervised by such person. The prohibition in the preceding sentence shall

continue until the Administrator certifies that the condition giving rise to such conviction has

been corrected.”).

See Md. Code Ann., State Fin. & Proc. § 16- 203(c) (“A person may be debarred from entering

into a contract with the State if the person, an officer, partner, controlling stockholder or

principal of that person, or any other person substantially involved in that person’s contracting

activities has been debarred from federal contracts under the Federal Acquisition Regulations, as

provided in 48 C.F.R. Chapter 1.”); see also N.J. Admin. Code § 17:19-4.1 (“In the public

interest, the DPMC may debar a firm or an individual for . . . Debarment or disqualification by

any other agency of government.”).

Mass. Gen. Laws Ann. ch. 29, § 29F(c)(2) (“Notwithstanding any other provision of this

section, any contractor debarred or suspended by any agency of the United States shall . . . be

simultaneously debarred or suspended under this section, with respect to non-federally aided

contracts; the secretary or the commissioner may determine in writing that special circumstances

exist which justify contracting with the affected contractor.”)

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In FY 2014, the prohibition was tied to the use of specific funds appropriated under certain

divisions, such as Division B, Commerce, Justice, Science and Related Agencies; Division C,

Department of Defense; and Division D, Energy and Water Development and Related Agencies,

among others. The 2016 Appropriations Act now inserts the prohibition into Title VII of

Division E, Financial Services and General Government Appropriations, which is titled “General

Provisions–Government-wide.”