Challenging the Administration’s Impoundment of Foreign Assistance Appropriations

admin on August 11, 2019

By Robert Nichols

OMB claims that President Trump has the power to freeze appropriations until after they expire.  GAO maintains that such action would violate the Constitution’s Separation of Powers and the Impoundment Control Act – the very statute Congress enacted to curb similar abuses by President Nixon.  At stake is $4.3 billion in unobligated foreign assistance appropriations due to expire September 30.

For the second August in a row, OMB has begun impounding these appropriated funds, only to relent when foreign aid advocates have pushed back.  Insider sources, however, tell us that OMB may proceed in sending a rescission bill to Capitol Hill within the next 10 days.  Relying on political pressure and a divided Congress to save the funding may be an unacceptable risk, given the stakes.

Would a Federal judge issue an injunction to keep the appropriations available to the Agencies?  Perhaps.  At the same time, the Administration may bet that no interested party – Congress, GAO, States, International Organizations, Contractors, or NGOs – is able and willing to bring a lawsuit in time to save the appropriations.

But in our view, if an able party is willing to bring a lawsuit, while there are legitimate issues to overcome, they should be surmountable.

The current dispute over foreign aid funding arises around politics and fiscal policy.  It may ultimately be decided by a judge hearing from lawyers who know both government contracts law and appropriations law.[1]  This article outlines several legal issues that interested parties should understand as they monitor OMB’s actions relating to foreign assistance appropriations.

Recent Events

On August 3, 2019, OMB sent the attached letter to the State Department and USAID freezing foreign aid funds that Congress appropriated for FY19.  The letter states:

Pursuant to the authority delegated to me by the Acting Director of OMB to carry out OMB’s apportionment authority under 31 U.S.C. 1512, this letter constitutes a reapportionment of all previously approved apportionments of the below-mentioned Treasury Appropriation Fund Symbols (TAFS). All previously apportioned unobligated resources in the TAFS shall be unavailable for obligation until three business days after the Office of Management and Budget receives an accounting from your agencies of the current outstanding unobligated resources in the TAFS.

The letter lists eight areas that cover a variety of assistance:  international organizations, peacekeeping operations, international narcotics control and law enforcement, development aid, assistance for Europe, Eurasia and Central Asia, economic support funding, foreign military financing programs, and global health programs.

Foreign aid advocates sounded the alarm that the Administration planned to cancel the target funding – or possibly keep it frozen until it expires September 30.  Dozens of NGOs released a joint statement this past Thursday condemning the action.  Four top foreign policy lawmakers sent a tough bipartisan letter directly to Mulvaney.

Understanding Appropriations Law

The Constitution assigns to Congress the power to control the government’s purse strings.  This is perhaps “the most important single curb in the Constitution on Presidential power.”[2]  Congress implements its power through the annual budget and appropriations process and through a series of permanent statutes that establish controls on the use of appropriated funds.  This legal framework is designed to combat abuses by the Executive Branch.

Simply put, Congress appropriates, OMB apportions, and the receiving agency allots (or allocates) within the apportionment.[3]  OMB’s August 3rd letter addressed only the reapportionment of funds.  Reapportionment occurs when there is a need to make “changes to the previously approved apportionment for the current year.”[4]  This is a standard budgetary tool – except that, in this case, it was likely not being used to move funds but rather to impound them so the agencies cannot spend them.

Impoundment is any Executive action or inaction that temporarily or permanently withholds, delays, or precludes the obligation or expenditure of budgetary resources.[5]  These are most often seen as political battles between Congress and the White House.  When President Nixon threatened to withhold appropriations for programs that were inconsistent with his policies, Congress enacted the Congressional Budget and Impoundment Control Act of 1974 (ICA).[6]  The ICA defines two types of impoundments and establishes the conditions for each.

  • The President may ask Congress to rescind all or part of an appropriation and may freeze the funds for 45 days of “continuous session” while they consider this request rescission legislation. If Congress does not act, the President must immediately unfreeze the funds for agency obligation and expenditure.
  • The President may issue a deferral – that is, temporarily freeze the appropriated funds to be disbursed later in the year.[7]

Under the ICA, the President must immediately notify both houses of Congress when taking either a rescission or a deferral action so that Congress can respond.  The existence and timing of this notice is key.

Dispute Over Impoundment Powers

There is a strong argument that OMB’s August 3rd letter, by itself, constitutes an illegal impoundment of appropriated funds if OMB failed to timely notify Congress of the action.  Having said that, the Administration’s release of funds this past Friday effectively mooted this issue.  Ensuring proper notice is an important requirement to keep in mind for future actions.

More significant here is the legal question of whether the President has the authority to impound appropriated funds until after they expire.  On this point, GAO and OMB appear to be at odds.  The General Counsel of GAO opined on this issue in a December 2018 letter to the Committee on the Budget of the U.S. House of Representatives.[8]  GAO’s opinion referenced (but did not include) a letter from OMB’s General Counsel on the same topic.

GAO takes the position that the President has no power to impound funds except in the limited circumstances authorized by the ICA.  Congress did not intend the ICA to authorize the President to use either a rescission or a deferral action to impound funds past their expiration date.  If the Administration were to try to do so, it would be unilaterally revising the appropriation law, which not only would exceed the authorities conferred in the ICA but also constitute an illegal line-item veto.

GAO maintains that:

It would be an abuse of this limited authority and an interference with Congress’s constitutional prerogatives if a President were to time the withholding of expiring budget authority to effectively alter the time period that the budget authority is available for obligation from the time period established by Congress in duly enacted appropriations legislation. It would be inimical to the ICA and to its constitutional underpinnings for the executive to avail itself of the withholding authority in the ICA, but to ignore the remainder of the process.

Without citing any particular statutory language, GAO contends that the ICA authorizes the President to impound funds for up to 45 calendar days for a rescission, but only if the Administration releases the funds “in sufficient time . . .  to be prudently obligated.”  The opinion draws no bright lines about what is sufficient time, saying that it may be hours or days or weeks or months based on the program at issue.  GAO also cites no consequences for the Administration if it does not provide for sufficient time.  GAO describes some “particularly troublesome” past instances when OMB lifted an impoundment with insufficient time for the agency to prudently obligate the unfrozen funds.

In response, OMB correctly asserts that the language of the ICA does not expressly preclude an impoundment from persisting through the date on which amounts would expire. The ICA may require sufficient time following a deferral for the funds to be spent, but the statute’s language on rescissions is silent on the matter.  According to OMB, these distinctions demonstrate that Congress did not intend for the President to make withheld budget authority available for obligation before the end of the fiscal year. The ICA grants the President authority to withhold funds for the entire 45-day period, even if such withholding would result in the expiration of impounded balances.

The fact is that GAO and OMB appear not to agree on the proper interpretation of this statute raises the prospect of unilateral action by the Administration.

Questions in Bringing a Challenge

We have studied all of the legal arguments and authorities cited by GAO and OMB.  Both sides are relying on their own interpretation of what is, unfortunately, a vaguely-written law.  Having said that, we believe that GAO is almost certainly right that OMB would be acting illegally if it simply issues a deferral or rescission notice and tries to “run out the clock” on the appropriation.  But that question is academic unless some interested party takes legal action against the Administration.

In our view, bringing this challenge need not wait for OMB to issue its rescission notice but should be started immediately.  The Administration has already improperly impounded funds and is likely to do so again in the coming days.  Having arguments and papers ready to file is important.

Any legal challenge would likely occur in the U.S. District Court for the District of Columbia.  Plaintiffs would want to seek a temporary restraining order and permanent injunction, either enjoining the rescission notice entirely or providing other such relief that would leave proportionate time after the notice period for the unfreezing, obligation, and expenditure of funds before they expire.

Finally, and perhaps most important:  who is able and willing to bring the challenge.  A litigant can bring a court action only if it establishes standing.  Members of Congress generally do not have standing to bring a lawsuit on behalf of Congress,[9] and industry associations have met mixed results when suing on behalf of their members.[10]  The ICA authorizes the Comptroller General to hire legal counsel to bring an action,[11] but the hurdles to that happening are uncertain.[12]  Beneficiaries of the foreign funding – including Contractors, and NGOs – may be the best hope for establishing standing, though they too have standing hurdles to overcome.[13]  Perhaps a combination of these interested parties has the best chance of success.

In the end, though, the largest barrier may be whether there is a sufficient level of desire for taking on this fight.

[1] Robert Nichols is a government contracts lawyer who started his career as a fiscal law attorney in the Honors Program of the U.S. Army Corps of Engineers.  GAO’s Managing Associate General Counsel on this matter, Julie Matta, came from the same program. The former General Counsel of the Social Security Agency and regularly dealt with OMB on appropriations issues.

[2] Principles of Federal Appropriations Law, Fourth Ed., Ch. 1 (2016) (“GAO Redbook”), available at https://www.gao.gov/assets/680/675709.pdf.

[3] 31 U.S.C. §§ 1511-1516.

[4] See OMB Circular No. A–11, Preparation, Submission, and Execution of the Budget, Section 120 (2019), available at https://www.whitehouse.gov/wp-content/uploads/2018/06/a11.pdf.

[5] OMB Circular A-11, § 112.2.

[6] Pub. L. No. 93-344, 88 Stat. 297 (codified as amended in scattered sections of 2 U.S.C.).

[7] 2 U.S.C. §§ 682-684

[8] Impoundment Control Act—Withholding of Funds through Their Date of Expiration, B-330330 (Dec. 10, 2018), https://www.gao.gov/assets/700/695889.pdf.

[9] See William C. Freeman and Kevin M. Lewis, Congressional Participation in Litigation: Article III and Legislative Standing, CRS Report R45636 (Mar. 28, 2019), available at https://fas.org/sgp/crs/misc/R45636.pdf (“[C]ourts have generally (though not universally) been less willing to permit individual legislators to seek redress for injuries to a house of Congress as a whole, at least in the absence of explicit authorization to do so from the legislative body itself”).

[10] The U.S. Supreme Court has held that an association has standing to sue on behalf of its members only if the following conditions are met:  (1) the association’s members would otherwise have standing in their own right, (2) the interest the association is seeking to protect is germane to the association’s purpose, and (3) neither the claim asserted, nor the relief requested, requires participation of individual members in the lawsuit.  Hunt v. Wash. State Apple Adver. Comm’n, 432 U.S. 333 (1977).

[11] 2 U.S.C. § 687.

[12] See Wm. Bradford Middlekauff, Twisting the President’s Arm: The Impoundment Control Act as a Tool for Enforcing the Principle of Appropriation Expenditure, 100 Yale L.J. 1 (1990) (describing the Reagan Administration’s attempts to resist GAO enforcement of the ICA).

[13] In Public Citizen v. Stockman, 528 F.Supp. 824 (D.D.C. 1981), a Federal court found no private right of action for an ICA challenge, but that case may be distinguishable.

Unallowable or Expressly Unallowable? It’s Not Even a Question.

admin on August 2, 2019

By Andrew Victor, Adrian Wigston

Recently, the Defense Contract Audit Agency (DCAA) updated its internal guidance to refine its approach to identifying “expressly unallowable costs,” particular items or types of cost that, under the express provisions of an applicable law, regulation, or contract, are identified as unallowable.  See FAR 31.001; 9904.405-30(a)(2) (Cost Accounting Standard 405).  This is a fundamental concept because contractors must exclude expressly unallowable costs from their proposals, invoices, and claims.  FAR 31.201-6.  If a contractor includes them, the contractor may be subject to penalties (generally the amount paid for the expressly unallowable cost), plus interest. Further, if the costs had previously been identified as unallowable (such as during an audit), then an agency can impose twice the standard penalty.

For the past four years, DCAA’s previous guidance offered what many considered to be too much flexibility for its auditors to interpret whether a selected area of contract cost was expressly unallowable.  DCAA had taken the aggressive position that “a cost can be expressly unallowable even though the cost principle does not explicitly state that the cost is unallowable or not allowable.”  DCAA Mem. for Reg’l Directors, Jan. 7, 2015, at 2.  This approach sometimes led to decisions adverse to the government before the boards and courts.  For example, the Armed Services Board of Contract Appeals in Raytheon Co., 17-1 BCA ¶ 36,724 (Apr. 17, 2017), handed the contractor a victory arising from a dispute with the government over “aircraft fractional leases,” essentially corporate aircraft leasing costs used for private corporate travel instead of commercial airfare.  According to the board, no law or regulation specifically identified aircraft fractional lease costs or stated that they are unallowable.  FAR 31.205-46, Travel Costs, referenced the costs of travel by contractor-leased aircraft and airfare costs in excess of “customary airfare,” but these categories, in the board’s view, were not equivalent to aircraft fractional leases and, therefore, not an expressly unallowable cost subject to a penalty.

Superseding its prior guidance, DCAA’s 2019 policy reins in its approach.  Now, the agency has narrowed its focus and will scrutinize only selected areas of cost that are stated as unallowable or not allowable in “express” terms.

In our view, this is a welcome course correction.  For government contractors, this new guidance should help them make better informed assessments as to whether certain costs are expressly unallowable and subject to penalties.

The Supreme Court Interprets “Confidential” Under FOIA To Provide Contractors More Protection Against Unwanted Disclosures of Their Business Information

admin on July 11, 2019

By Andrew Victor and Robert Nichols

In closing out its most recent term, the U.S. Supreme Court released an opinion, Food Marketing Institute v. Argus Leader Media (FMI), that re-defined the scope of Exemption 4 of the Freedom of Information Act (FOIA), which addresses confidential commercial or financial information. The decision overturned the long-standing “substantial competitive harm” test first articulated by the Court of Appeals for the D.C. Circuit in National Parks & Conservation Association v. Morton, a decision widely adopted by various courts around the country. We expect that the decision will allow contractors to invoke Exemption 4 more easily to prevent unwanted disclosures of their information.

FOIA’s Exemption 4 prevents the disclosure of “trade secrets and commercial or financial information obtained from a person and privileged or confidential.” In National Parks, the D.C. Circuit held that the person seeking to prevent disclosure under Exemption 4 had to demonstrate that release of the information would cause “substantial competitive harm.” But in FMI, the Supreme Court concluded that “substantial competitive harm” could not be supported by FOIA’s text and jettisoned the test. The Court stated that “confidential” in Exemption 4 means information “customarily kept private” or “closely held,” and that such information may remain confidential when disclosed — such as when submitted by a contractor to an agency — if the party receiving it provides some assurance that it will remain secret.” With this definition in hand, the Court held the following: “At least where commercial or financial information is both customarily and actually treated as private by its owner and provided to the government under an assurance of privacy, the information is ‘confidential’ within the meaning of Exemption 4.”

For government contractors, FMI should make it easier to protect information from unwanted disclosure because there is no need to show “substantial competitive harm.” Given the recency of the decision, if a contractor is trying to prevent disclosure of its information and the agency finds that the contractor has not shown substantial competitive harm, the contractor must point out that the agency is using the wrong test.

For the new test, contractors should clearly document that the information at issue is customarily kept private within the company. This can be done through adhering to company policies that prohibit the disclosure of the information and by placing protective legends and coversheets on documents. Further, contractors should review their training of employees to ensure that when information is given to an agency, it has been handled in a way to maintain secrecy and to communicate that clearly to the agency.

Regarding the “assurance of privacy” from the government, contractors should ask for such assurance up front before handing over their information. Even if such reassurance appears redundant due to the contractor’s business relationship with the agency, the contractor should get written confirmation from agency personnel, ideally the contracting officer, stating that the agency recognizes the information from the contractor is confidential and will handle such information appropriately. Additionally, agencies will respond themselves to FMI and produce their own guidance. Contractors should ask for such guidance whenever providing confidential information to an agency.

In taking these proactive steps, contractors should be able to establish whether information qualifies as “confidential” under Exemption 4. Thus, a contractor can make an agency’s decision to withhold information subject to a FOIA request easier, that is — not to disclose confidential information.

Cybersecurity as an Insecurity in the FCA Space

admin on June 5, 2019

By Robert Nichols & Jason C. Lynch

In April 2014, Robert Nichols co-authored a Briefing Paper entitled Cybersecurity for Government Contractors, which is available on our website.[1] The paper discussed the growing regulatory requirements that government agencies had been imposing on contractors to protect government data.  It also warned that failure to abide by these new cybersecurity requirements could lead to potential False Claims Act (FCA) liability.  This prediction has now come true, as described below.  But first, a little more background.

The USIS Incident

Just four months after the Briefing Paper was published, on August 6, 2014, US Investigative Services LLC (USIS), the largest commercial provider of background investigations to the federal government, issued a media statement:

“Our internal IT security team recently identified an apparent external cyber-attack on USIS’ corporate network. We immediately informed federal law enforcement, the Office of Personnel Management (OPM) and other relevant federal agencies. We are working closely with federal law enforcement authorities and have retained an independent computer forensics investigations firm to determine the precise nature and extent of any unlawful entry into our network.  Experts who have reviewed the facts gathered to-date believe it has all the markings of a state-sponsored attack.”

Yet within a matter of months, USIS was in bankruptcy, thousands of its employees were laid off, and its assets and remaining government contracts were transferred to another contractor.  Why?  USIS had committed no crime.  The company had self-identified and reported the cyber breach to federal authorities and by all accounts cooperated with their investigation.  And it had early detection systems that the government had approved and reviewed on a regular basis.  At bottom, though, federal officials had lost confidence in the company.

The USIS incident demonstrated that contractors – because they hold valuable government information – are targets for cyber criminals and state actors.  Just last year, The Washington Post reported that “China hacked a Navy contractor and secured a trove of highly sensitive data on submarine warfare.”  This has been precisely the government’s concern – and why new regulatory standards keep finding their way into contract clauses that govern the cyber activities of contractors.  As a result of such clauses, contractors are now required to undertake cyber measures that they may not even have considered just a few years ago, and the number of such requirements is growing at a rapid pace.

And now the consequences of non-compliance have just gone up.

Applying the FCA to Cyber

Just last month, a federal judge denied a contractor’s motion to dismiss an FCA case premised on noncompliance with federal cybersecurity requirements.  The case undoubtedly portends more cyber-based FCA suits.

In United States ex rel. Markus v. Aerojet Rocketdyne Holdings, Incorporated, No. 2:15-cv-2245, slip op. (E.D. Cal. May 8, 2019), defendants’ former senior director of Cyber Security, Compliance and Controls alleged that defendants fraudulently misrepresented their compliance with DoD’s and NASA’s minimum security requirements for safeguarding unclassified controlled technical information.  The relator alleged that, as a result, the government was fraudulently induced to award contracts to the defendants.

The government declined to intervene in the case, and the defendants moved to dismiss the complaint for failure to plead materiality.  The court disagreed, holding that the relator’s allegations that defendants did not “fully” disclose the extent of their noncompliance with relevant regulations was sufficient to survive a Rule 12(b)(6) motion.  While the court did not find that compliance with cyber requirements is, in fact, material, the Markus decision is significant because of the ease by which a relator can plausibly plead a cybersecurity-based FCA case.

One of Aerojet’s more interesting arguments was that the defense industry’s general non-compliance with these regulations weighed against a finding of materiality.  As an aside, and as recently reported on,  for example, a survey of small and medium-sized defense contractors surveyed by the National Defense Industrial Association found that less than 60% of respondents had even read the DFARS requirement documentation, and over 45% had not read the NIST publication that forms the foundation for the DFARS requirements.[2]  Without conceding the point, the court held that “[e]ven if the government never expected full technical compliance, relator properly pleads that the extent to which a company was technically compliant still mattered to the government’s decision to enter into a contract.”  If this reasoning takes hold, relators would need only allege that some misrepresentation or omission was made in describing one’s cybersecurity safeguards in order to survive a motion to dismiss.[3]

It is challenging enough to keep up with the ever-evolving federal regulatory landscape on cyber.  The prospect of having to face qui tam suits based on any perceived misrepresentations regarding compliance only raises the stakes.  But the task is made harder still by the differing degrees to which agencies demand protection. This is exemplified in Markus, where DoD’s regulations define “adequate security” as “protective measures that are commensurate with the consequences and probability of loss, misuse, or unauthorized access to, or modification of information” (48 C.F.R. 252.204-7012(a)), but NASA’s regulations rigidly required contractors “to protect the confidentiality, integrity, and availability of NASA [information] and protect [it] from unauthorized disclosure” (48 C.F.R. 1852.204-76(a)).  On top of these technical and legal challenges, Ellen Lord, DoD Undersecretary for Acquisition and Sustainment, stated in January that DoD will begin auditing the cybersecurity procedures of companies that seek to do business with the government.

Unfortunately, we are likely to see many more cases like Markus in the coming years.

How We Can Help

Nichols Law advises on both cybersecurity requirements for government contractors, and the fallout from breaches and lapses in compliance related to these requirements.

[1] https://nichols.law/cybersecurity-for-government-contractors/

[2] http://www.ndia.org/-/media/sites/ndia/divisions/manufacturing/documents/cybersecurity-in-dod-supply-chains.ashx?la=en

[3] The court also rejected other, more traditional arguments in the wake of Escobar: that the government had been told of Aerojet’s non-compliance, if any; that the government continued to contract with Aerojet thereafter; that DOJ had declined the case; and that cybersecurity was not the “central purpose” of the missile-defense contract.

Getting Investigations Right:  Best Practices for Navigating Common and Divergent Interests

admin on May 21, 2019

By Annie Kim, Adrian Wigston and Robert Nichols

May 21, 2019

This article addresses best practices for responding to investigations by the USAID Office of Inspector General (OIG) and conducting internal investigations when there have been allegations of non-compliance.  It follows and builds upon another article published in the May 2019 issue of NGO Financial Newsletter:  Getting Disclosures Right:  Navigating Risks and Inconsistencies Between Regulations and Agency Expectations.

Why is this important?  We were called in as counsel for the Academy for Educational Development after its internal investigation and relationship with the OIG had irreparably soured.  We saw first-hand how a situation, which started with relatively minor bad facts, transformed into a crisis due to the handling of the investigation and coordination with the OIG.

Since then, we have seen other circumstances – far too many – where a USAID contractor or award recipient (collectively “implementing partners”) were similarly mishandling an OIG investigation and heading toward a potentially-catastrophic outcome.  In most of those matters, a change of approach to was able to save the implementing partner time, money, and reputational damage.

This paper highlights some of the considerations that – in our experience as investigators, auditors, and lawyers working with USAID – are of paramount importance for cooperating with the OIG while conducting an internal investigation to protect the organization.

Why Investigate? 

For most sophisticated defense contractors, OIG and internal investigations are a routine and necessary part of business.  Most implementing partners, however, are not as accustomed to these stressful circumstances.  Some entities are not even aware why an investigation is needed and the purposes they are designed to achieve.

As explained in our first article, Federal regulations mandate disclosures in certain circumstances and anticipate some level of investigation before those disclosures occur.  Indeed, the Federal Acquisition Regulations require that contractors have procedures to detect, process, investigate and assess possible violations.  See FAR 52.203-13.  So, investigations are built right into the regulatory standards for being an implementing partner.

Implementing partners and the OIG share some of the same objectives in investigating, but their respective purposes and perspectives are not coterminous.

The government’s responsibility, specifically the Office of Inspector General (OIG), is to combat fraud, waste, and abuse on government programs.  When the OIG receives an allegation, its investigators must evaluate every complaint received and make an initial determination: take no action or open a complaint for further inquiry, or initiate investigative activity and formally escalate a complaint to an opened case matter.

Where the OIG finds that wrongdoing has occurred, it refers the matter to the appropriate authority/authorities:

  • To the Department of Justice to bring a criminal or False Claims Act case;
  • To USAID’s Compliance Division in the Office of Management Policy, Budget and Performance to consider suspension and/or debarment action;
  • To the contracts or grants official to disallow costs, terminate an award or funding, or other administrative relief;
  • To domestic or international local law enforcement offices for prosecutorial action.

Together, the end goals of the OIG’s investigations and referrals are to identify wrongdoing, punish wrongdoers, make the government whole, and deter future misconduct.

Implementing partners facing an allegation of wrongdoing may share these same end goals but also have their own objectives and perspectives.  Putting aside whether implementing partners are required to investigate, they should conduct their own investigations for good reasons:

  • The amount of disallowances due to non-compliance can continue to grow while an OIG conducts its investigation, and failure to take reasonable steps to detect and stop ongoing violations can increase the chances of a False Claims Act case. An implementing partner wants to identify any wrongdoing as quickly as possible and put an end to it, to contain the financial and reputational harm to the government and the organization.
  • Short of criminal or civil liability, or in conjunction with it, partners could also face potential suspension and debarment action for not operating as a responsible partner.
  • An implementing partner needs to understand where its internal controls failed and identify remedial and corrective measures to preclude future violations.
  • The complaint to the OIG may be meritless, and an early internal investigation by the implementing partner may establish this, saving resources for both the government and the implementing partner.
  • An implementing partner that independently gathers and analyzes the facts inspires more trust from the government.
  • A credible internal investigation can put the implementing partner on more solid factual ground to help counter incomplete assertions made by the government. It can also provide stronger defenses to mitigate liability when the matter is referred to the Justice Department, USAID’s Compliance Division, and/or the contracting or grant official.

While an internal investigation can be costly, a typical Directors & Officers Insurance policy will often pay for reasonable costs – particularly when conducted in coordination with an ongoing OIG investigation.

Dealing with an OIG Investigation

If the OIG decides to initiate an investigation, it will expect cooperation and communication from the implementing partner.  This is also usually in the best interest of the implementing partner.  At the same time, different agency OIGs sometimes have varying expectations of what cooperation entails and press implementing partners beyond accepted norms of reasonableness.  Implementers sometimes too readily accommodate every OIG request, regardless of reasonableness.  Understanding the legal requirements and generally accepted standards across agencies helps put this into context.

When faced with an OIG request for interviews or documents, implementing partners first should ask themselves two questions: (1) what am I legally required to provide; and (2) what should I provide.  For example, if the OIG serves a subpoena duces tecum asking for certain documents relating to a particular procurement but the OIG agent asks for production of entire hard drives, implementing partners must provide the particular documents response to the request relating to the particular.  Whether the entity should provide more – e.g., the entire hard drive, which would include many non-responsive documents – is a decision that should be made only after consideration of a myriad of factors, such as including cost, burden, likelihood that the hard drive contains other sensitive but otherwise non-responsive documents, and whether future overly broad requests will be harder to resist if this request is granted.

With respect to dealing with the OIG in an investigation, our top 5 “tips” are as follows.

  1. Maintain credibility. Maintaining credibility by acting with unimpeachable integrity is perhaps the most important rule in dealing with the OIG.  OIG agents will not, and frankly should not, tolerate misrepresentations, obstructive behavior, and the like.
  2. Negotiate to narrow the scope of document requests. In our experience, OIGs often request far more documents than they need – or even will be able to review effectively.  The OIG and DOJ may not fully understand the breadth of documentation being requested, or it may purposefully draft broad requests to avoid missing topics and knowing that the implementing partner will seek to narrow the scope appropriately.  Implementing partners should not be afraid to negotiate the scope of a document request.  In our experience, OIG agents will almost always be amenable to tailoring their requests, so as not to waste time and resources.  This, of course, presumes that the implementing partner can credibly convey how the narrowing is designed to still get the government what it needs.
  3. Review the documents being produced. Reviewing the documents before handing them over to the government is important for several reasons.  First, it is the only way to identify what documents are actually responsive and need to be turned over.  Second, it enables the implementing partner to identify documents that should be withheld or otherwise protected, g., for HIPAA protections, GDPR protections, or attorney-client privilege.  In addition, review of the documents is part of the factual investigation that companies should be conducting to understand the nature of the government’s investigation and the facts relevant to determination of liability and defenses.
  4. Prepare for and attend witness interviews. Implementing partners not only should have a representative (preferably a lawyer) attend interviews of their employees but also should prepare those witnesses to understand the process and their role.  Witnesses must answer questions as truthfully and precisely as possible and not speculate as to facts.  Incorrect and imprecise answers do not serve anybody’s interests, including the government’s.  The representative can also take notes of the interviews, as most OIG interviews are not transcribed, to be able to refute any inaccurate OIG summaries.  This is important in all cases, but especially with local national, non-native English-speaking staff, as it increases the chances that responses can be muddled in translation and interpretations.
  5. Keep a record of communications with the OIG. It is important to keep records of what has been represented to the OIG to help avoid or resolve misunderstandings down the road.  For example, did an implementing partner representative assure the OIG that specific five witnesses are the only relevant witnesses or the most relevant witnesses?  Or did the representative state that, to the best of their knowledge, there are five individuals who would likely be the most relevant witnesses?  Did the representative assure the OIG that documents being produced are the only relevant documents?  Did someone commit to document productions on a certain time frame?  With turnover of staff and the length of time many investigations last, a log or other record of communications to identify requests already made and confirm promises made will likely be a significant time and resource saver in the future.  Similarly, it is important to maintaining a log of documents provided and relevant information extracted from those documents.

Conducting an Internal Investigation

Responding to the OIG’s requests, alone, is not enough – an implementing partner is always well-advised to conduct its own internal investigation for the reasons discussed above.  While most effective internal investigations share many common characteristics, there is no one single magical roadmap to be followed, as the best path is dependent on the circumstances surrounding each matter.  Here are our top 5 “tips”:

  1. Think carefully about who will conduct the investigation. Many investigations can be handled in-house, while others should be conducted by outside experts.  Deciding between the two routes depends on factors such as the complexity of the investigation, the seriousness of the allegations, the job positions of any suspected wrongdoers, whether “independent” investigators are advisable, whether the investigation should be conducted under the attorney-client privilege, and in-house capabilities.  In our experience, most federal agencies expect that an implementing partner will select a person with the qualifications and expertise to identify fraud indicators and run them to ground, stay clear of potentially obstructing with a government investigation, and understand how the violations occurred and what changes or improvements could be made to tighten up controls.
  2. Decide early whether to conduct the investigation under the attorney-client privilege. Some implementing partners have told us that OIG agents do not like it when they assert privilege and may make false assumptions that the entity is hiding something or otherwise making the OIG agent’s jobs more difficult.  Not surprisingly, we disagree and believe that all internal investigations should be conducted under privilege for three reasons.  First, it is the accepted view of compliance experts that that protecting privilege encourages corporate compliance and does not hinder the search for truth.[1]  Second, the OIG agents will almost never turn over their investigative findings before the end of the investigation (if ever), and an internal investigator should have the same discretion when seeking the truth and protecting the organization.  Third, as a practical matter, the implementing partner can waive privilege later, but cannot reinstate it once it is waived.
  3. Keep records of all investigation activities. This saves time and effort and may be needed to demonstrate reasonableness of the investigation.  Additionally, some OIG investigations go on for years and outlast the internal investigation and perhaps the original investigators for the OIG or the implementing partner (or quite possibly, the implementing partner entity itself).  An incomplete investigative record can lead to confusion or worse.
  4. Take care not to obstruct a potential or ongoing government investigation. There is an important sequence to investigations conducted by law enforcement so as to not “taint” evidence.  If the implementing partner confronts the subject of an allegation (or close friend of the subject) prematurely with the accusation, this may hinder the OIG’s ability to effectively build a case.  There is a risk that an internal investigation, even if done with sincerity and seriousness, can be seen as ineffective, and, worse yet, damaging to the government’s investigation.  In turn, this could develop distrust from the OIG and DOJ which may take moving mountains to overcome. In some instances, it is this distrust and skepticism from the government that suspension and termination of award decisions are based upon.
  5. Do not jump to conclusions until all the facts are in. And in this same vein, do not report negative findings if they have not been confirmed and the investigation is not complete.  If updates are provided to the OIG on where findings are likely heading in an investigation, provide complete context about what investigative activities have yet to be conducted and limitations the entity may face in reaching definitive conclusions so that the OIG understands that the facts may change.

*       *       *

Investigations can be stressful and, if not done right (or at all), can present many risks.  When done right, in contrast, there are rewards.  By implementing best practices in conducting investigations, implementing partners can best protect their organizations and maximize the chances that an investigation will lead to a just result.  Further, effective investigations and improved international controls can help instill confidence from agencies and OIGs that they are working with a responsible partner.

[1] See Brian Miller , “How Privilege Fits into the Compliance Puzzle,” HQ Investigations Quarterly, V.1, Issue 17 (2014).  https://nichols.law/wp-content/uploads/2019/05/How-Privilege-Fits-into-the-Compliance-Puzzle-1.pdf

 

GAO Sustains Protest Where Agency Said Too Much and Too Little During Discussions

admin on May 17, 2019

By Andrew Victor and Robert Nichols

In Total Home Health, B-417283, B-417283.2, a decision made public this month, the Government Accountability Office (GAO) sustained a protest where the Department of Veterans Affairs (VA) had misled the protester by discussing only some, but not all, of the overpriced Contract Line Items (CLINs) that made the protester’s pricing uncompetitive.  The decision also demonstrates the low evidentiary standard to establish prejudice.

The VA conducted an LPTA procurement for medical services and equipment.  After receiving six initial proposals, the VA concluded that all of the proposals were technically acceptable and decided to conduct discussions to obtain the best price.  During discussions, the Contracting Officer (CO) advised the protester that its price proposal was “relatively weak.”  In response, the protester asked the CO if the VA could provide any additional comments on its price.  The VA replied that it had anticipated lower pricing on three specific CLINs.  The protester accordingly submitted a revised price proposal that lowered its pricing for those three CLINs.  The VA, however, awarded the contract to another offeror, the price of which was about $11.3 million lower.  Indeed, the protester’s price was fourth lowest.

The protester complained to GAO, arguing that the VA had misled it during discussions.  The protester asserted that the agency’s focus on the three particular CLINs was incomplete because it did not reveal the fact that the agency also found other CLINs to be overpriced.  And even if the protester had lowered its prices for the three specified CLINs to $0, it still would not have beat the price of the awardee.  GAO agreed and sustained the protest on this basis.

In doing so, GAO explained that, if an agency engages in discussions in an LPTA procurement, it only needs to advise an offeror that its price is too high.  But if it elects to provide more information about overpricing on some of the CLINs, it must address overpricing on all of the CLINs.

GAO also found that the protester established competitive prejudice — even though it was had the fourth lowest price.  The protester did so through a declaration of its president who stated that, had the VA advised that the protester’s price was high in other than the three CLINs, the protester would have been able to submit a more competitively priced proposal.  GAO stated that it would not assume that the protester could not have submitted the lowest price.

After Total Home Health, contractors should expect agencies to be less forthcoming in discussions for LPTAs.  Where the agency does discuss some overpriced CLINs, however, it must also discuss other overpriced CLINs that make the proposal uncompetitive.  If the agency fails to do so, contractors can take comfort that they likely were misled and establish prejudice through an appropriate declaration.  Lastly, while GAO’s decision on this discussions requirement could be read as only applying to LPTAs, we believe that this rule could apply in other contexts.

Unanimous Supreme Court Gives Relators Three More Years to File FCA Suits

admin on May 15, 2019

Jason C. Lynch

As we predicted in our posting, Four Takeaways from Oral Argument in Cochise Consultancy, Inc. v. United States ex rel. Hunt, a unanimous Supreme Court has ruled that private qui tam relators may avail themselves of a provision in the FCA’s statute of limitations which allows a plaintiff to bring suit within three years after the United States official charged with the responsibility to act knew or should have known the relevant facts, even if that exceeds the usual six-year limitation.  31 U.S.C. § 3731(b)(2).

We first previewed the case here: Three-Way Split on a Three-Year Provision: the FCA goes back to the Supreme Court.  The Court unsurprisingly agreed that even a declined qui tam action is a “civil action under section 3730” within the meaning of Section 3731(b), and also rejected defendant’s argument that a relator could qualify as “the official of the United States charged with responsibility to act in the circumstances.”  31 U.S.C. § 3731(b)(2).

While we had hoped for some insight into the Court’s take on the government/relator relationship, the case was resolved on a fairly straightforward statutory analysis.

FEATURE COMMENT: When The King No Longer Wants You Suing In His Name: The NHAG Saga And Its Implications For DOJ’s Ability To Dismiss Qui Tam Suits

admin on May 6, 2019

By Bob Rhoad

May 1, 2019

Whether and when the Department of Justice may dismiss cases brought by private individuals under the qui tam provisions of the False Claims Act has been raised for many years. The debate is now reaching a crescendo.  We have just published a Feature Comment in The Government Contractor that discusses the recent decisions in the “NHAG” cases and their implications for DOJ’s ability to dismiss qui tam suits. Click here to download the article.

[pdf-embedder url=”https://nichols.law/wp-content/uploads/2019/05/19-5-1-When-The-King-No-Longer-Wants-You-Suing-In-His-Name.pdf” title=”19-5-1 When The King No Longer Wants You Suing In His Name”]

World Bank Issues First Annual Report on its Sanctions System: Time for a Refresher

admin on April 30, 2019

By Jason C. Lynch

 While most contractors are familiar with the suspension and debarment procedure under the Federal Acquisition Regulation FAR, few international contractors may have encountered the World Bank’s compliance system.  The Bank’s first-ever joint Sanctions System Annual Report gives us a good opportunity to review that system.  The report also gives a glimpse into the Bank’s current enforcement efforts and priorities.

Like most U.S. agencies, the Bank’s sanctions system roughly divides into investigative and adjudicative functions.

Investigations

The Bank’s Integrity Vice Presidency (“INT”) conducts investigations and forensic audits.  Think of INT as the analogue to an inspector general for a U.S. agency.  INT investigates both internally (Bank staff or vendors) and externally (private companies and individuals who have bid on or are participating in Bank-financed contracts).  Whether internal or external, INT’s investigation will focus on five types of misconduct: fraud, corruption, collusion, coercion, and obstruction.  Complaints about these practices come from Bank staff (e.g., 18.5% of FY2018 complaints) and from non-Bank sources (81.5%).  Assuming that the complaint pertains to one of the five sanctionable practices above, INT opens a preliminary investigation.

In determining whether to move from a preliminary investigation to a full investigation, INT considers the seriousness of the allegations; the potential development impact of the alleged misconduct; the credibility of the complainant; the presence of corroborating evidence; and the amount of project and contract funds involved.  If the allegations are found to be more likely true than not, the complaint is deemed “substantiated.”

In FY2018, INT received 1,426 complaints.  Of these, 927 received no further action; 130 were forwarded to other Bank units; and 379 were investigated preliminarily by INT.  In the same year, INT opened 68 new investigations and closed 71 investigations, 48 of which were substantiated.

The investigations opened and closed in FY2018 overwhelmingly fell into three classes of misconduct: fraud, corruption, and collusion—in that order.  That is consistent with previous years, as is the relative distribution of cases among the categories.[1]

Adjudications

When a complaint is substantiated by an investigation, a final investigation report (FIR) is submitted to the Bank President.  In addition to the FIR, INT may prepare a “referral report” (to a member country’s national authorities, if there is evidence that the country’s laws were broken) or a “redacted report” (to the Bank’s Board of Executive Directors and made public after the sanctions process is complete).  INT also prepares a Statement of Accusations and Evidence (“SAE”) to initiate the Bank’s two-tier adjudication process.

The SDO

The first tier is the Bank’s Chief Suspension and Debarment Officer (“SDO”), who is akin to an agency’s SDO.  The SDO reviews the SAE to determine whether it contains sufficient evidence to support the allegations.  If not, the SDO remands the matter back to INT for further development.  If so, the SDO will issue a Notice of Sanctions Proceedings (“NOSP”) to the accused, referred to as the respondent.  The SDO will also recommend a sanction, such as debarment from bidding or participating in a Bank-financed activity.

In FY2018, INT referred 28 cases.  The SDO reviewed 27 of these and remanded 12 to INT for revisions.  Two others were rejected out of hand.  OSD initiated 29 proceedings in FY2018 and temporarily suspended 20 respondents (29 firms and 11 individuals).

The NOSP starts the clock ticking for the respondent to contest the allegations.  And critically, if the SDO has recommended debarment, the respondent is suspended in the meantime.[2]  (Think of this as the “notice of suspension and proposed debarment” that we commonly see from SDOs at U.S. agencies.)  If the respondent doesn’t contest the NOSP within 90 days to contest the allegations, then the SDO imposes the recommended sanction.  In FY2018, more than half of respondents did not challenge their proposed sanctions.  As with previous years, the vast majority of cases and settlements pertained to fraud, corruption, and collusion.

The Sanctions Board

If the respondent does contest the sanctions, the case proceeds to the second tier: the Sanctions Board.  The Board comprises seven members: three appointed by the Bank; two by the International Finance Corporation; and two by the Multilateral Investment Guarantee Agency.  All seven members are external to the Bank and serve a single term of up to six years.

The Board conducts a de novo review of the respondent’s case and often considers a more expansive record, thanks to the additional round of briefing that the parties are afforded.  Either party may request a hearing before the Board, which is confidential and informal.  Although INT presents first, the respondent is given the last word.  The Board has published its decisions dating back to 2012.

In FY2018, the outcomes of Board review were interesting.  In fully 60% of its decisions, the Board imposed a lesser period of debarment than as imposed by the SDO.  In another 16% of cases, the Board eliminated the sanction entirely.  In 19% of cases, the Board imposed a greater period of debarment.  Thus, in only 5% of cases did the Board impose the same period as the SDO.

These data strongly suggest that an appeal is worth the time and effort.  In more than three quarters (76%) of cases, the respondent obtained a lesser sanction or no sanction at all.  That is a far better appellate success rate than one finds, for example, in the federal courts.

Settlements

We should also note that individuals and companies may resolve allegations through settlement, in lieu of the sanctions process above.  One of the SDO’s tasks is to review these settlements, which are usually negotiated and drafted by INT and reviewed preliminarily by the Bank’s Office of General Counsel.

There has been an inverse trend among sanctions cases and settlements in the past five years: settlements have steadily increased as sanctions cases have declined:

FY2014 FY2015 FY2016 FY2017 FY2018
Sanctions 44 38 44 21 27
Settlements 6 11 18 22 26
Total 50 49 62 43 53

These data suggest, at least, that the Bank’s settlement process is effective.

Conclusion

We hope this is a useful introduction to, or refresher on, the World Bank’s unique sanctions system and a valuable insight into the focus of the Bank’s enforcement efforts of late.

 

 

[1] 30 of the 68 new investigations were internal to the Bank, as were another 30 carried over from FY2017.  Half of these 30 cases were closed this past year: 11 substantiated; 15 substantiated; 3 unfounded; and 1 “other.”  This ratio is consistent with previous years.

[2] The only exception is where the SDO has recommended a debarment of six months or less.