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CMSLibrary C2-07-13 7500SecurityBlvd. Baltimore, Maryiend 21244 1102thdCSeosnsgironess' HOUSEOFREPRESENTATIVES 1R1e0p-o5r9t9 CLOSETHECONTRACTORFRAUDLOOPHOLEACT APRIL22,2008.—CommittedtotheCommitteeoftheWholeHouseontheStateof theUnionandorderedtobeprinted Mr.Waxman,fromtheCommitteeonOversightandGovernment Reform,submittedthefollowing REPORT togetherwith ADDITIONALVIEWS [ToaccompanyH.R.5712] [IncludingcostestimateoftheCongressionalBudgetOffice] TheCommitteeonOversightandGovernmentReform,towhom wasreferredthebill(H.R.5712)torequiredisclosurebyFederal contractorsofcertainviolationsrelatingtotheawardorperform- anceofFederalcontracts,havingconsideredthesame,reportfa- vorablythereonwithanamendmentandrecommendthatthebill asamendeddopass. CONTENTS PurposeandSummary Pag2e BackgroundandNeedforLegislation 2 LegislativeHistory 3 Section-By-Section 4 ExplanationofAmendments 4 CommitteeConsideration 4 RAoplpllciaclaltVioonteosfLawtotheLegislativeBranch 44 StatementofOversightFindingsandRecommendationsoftheCommittee 4 StatementofGeneralPerformanceGoalsandObjectives 4 ConstitutionalAuthorityStatement 5 FederalAdvisoryCommitteeAct 5 UnfundedMandatesStatement 5 EarmarkIdentification 5 CommitteeEstimate 5 BCuhdagnegtesAuitnhEoxriisttyinagndLaCowngMraedsesibonyatlheBuBdilgle,tasOfRfiecpeorCtoesdtEstimate 56 69-006 2 Theamendmentisasfollows: Strikeallaftersection1andinsertthefollowing: SEC.2.REVISIONOFTHEFEDERALACQUISITIONREGULATION. d7a2tTeFheeodfFRteehdgee.rea6nl4a0cA1ct9qm,ueinNstoitvoiefomntbhReisergAu1cl4ta,tp2i0uo0rn7s)ushaoanrltlatnboeyFfaAomlRelnoCwda-eosdneFw2iA0t0Rh7i-cn0a0s16e80t(oasdianpycuslbuladifestheprerdotvhiae-t sionsthatrequiretimelynotificationbyFederalcontractorsofviolationsofFederal criminallaworoverpaymentsinconnectionwiththeawardorperformanceofcov- eredcontractsorsubcontracts,includingthoseperformedoutsidetheUnitedStates andthoseforcommercialitems. SEC.3.DEFINITION. InthisAct,theterm"coveredcontract"meansanycontractinanamountgreater than$5,000,000andmorethan120daysinduration. PURPOSEANDSUMMARY H.R.5712,theClosetheContractorFraudLoopholeAct,wasin- troducedbyRep.PeterWelchonApril3,2008.Thebill,asamended,mandatesthattheFederalAcquisitionRegulationbeamended within180daystorequirecontractorstoreportviolationsoffed- eralcriminallawandover-paymentsoncontractsover$5million, includingcontractsperformedoverseasandcommercialitemcon- tracts. BACKGROUNDANDNEEDFORLEGISLATION Eachyearthefederalgovernmentspendsbillionsofdollarsto procure goods and services, makingfederal contracts one ofthe fastestgrowing components ofthe federal budget. In fiscalyear 2006,thefederalgovernmentspentover$400billionthroughcon- tracts. Thesteadyincreaseinfederalspendingandrecenthigh-profile criminalandcivilmattersinvolvingfederalcontractorshasheight- enedtheneedtodetect,investigate,andprosecutefraudinover- seascontracting.ThisCommittee'sinvestigationshaveuncovered millionsofdollarsinwastefulandfraudulentspendingoncontracts overseas.Todate,theDepartmentofJustice(DOJ)hascharged46 individualsandcompaniesforcontractfraudrelatingtocontracts in Afghanistan, Kuwait, and Iraq. However, overseas contracts wereexemptedfromaproposedrulerequiringfraudreportingby contractors. OnMay23,2007,DOJrequestedthattheFederalAcquisition Regulation be amended to "require contractors to establish and maintaininternalcontrolstodetectandpreventfraudintheircon- ttrhaecytsb,eacnodme.a.wa.rnoetioffyaccoonnttrraaccttinogveofrfpiaceyrmsewnittohrouftraduedl,aryawthheernetvhearn waitforitsdiscoverybythegovernment."1 DOJbelievedsucha rulewasnecessarybecausefewgovernmentcontractorshavecom- pliedwiththeexistingvoluntarydisclosureprogram.DOJproposed specificchangestotheFederalAcquisitionRegulation. Inresponse,onNovember14,2007,theCivilianAgencyAcquisi- tionCouncilandtheDefenseAcquisitionRegulationsCouncilpub- lishedaproposedruleon"ContractorComplianceProgramandIn- tegrityReporting."Thisrulerequirescontractorstohaveacodeof ethicsandbusinessconduct,toestablishandmaintainspecificin- me1nLtetPtoelricfyrPoamulAsDseinsettantt(AMtatyor2n3,ey20G0e7n)e.ralAliceFishertoAdministratorforFederalProcure- 3 ternalcontrolstodetectandpreventimproperconductinconnec- tionwith the award or performance ofgovernment contracts or subcontracts,andtonotifycontractingofficerswithoutdelaywhen- evertheybecomeawareofviolationsoffederalcriminallawwith regardtosuchcontractsorsubcontracts. However,theproposedruleonfraudreportingaddedtwoexemp- tionsnotincludedintheDOJproposal:anexemptionforcontracts tobeperformedoutsideoftheUnitedStatesandasecondexemp- tionforcontractsforcommercialitems. OnJanuary14,2008,DOJfiledacommentontheproposedrule statingthat"wedonotagreewith"theexemptionforoverseascon- tracts.AccordingtoDOJ,"[a]lthoughthesecontractsmaybeper- formedoutsidetheUnitedStates,theUnitedStatesstillisaparty tothesecontractsandpotentiallyavictimwhenoverpaymentsare madeorwhenfraudoccursinconnectionwiththecontracts.Under thesecircumstances,thegovernmentstillmaintainsjurisdictionto prosecutetheperpetratorsofthefraud. Moreover,thesetypesof contracts,whichinmanycasessupportoureffortstofighttheglob- alwaronterror,needgreatercontractorvigilancebecausetheyare performedoverseaswhereU.S.governmentresourcesandremedies aremorelimited."2AnothercommentfiledbytheAmericanBar Associationquestionedwhethertheacquisitioncouncilshadstatu- toryauthoritytocreateafraudreportingrequirementbyregula- tion. H.R. 5712, the Close the Contractor Fraud Loophole Act, as amended, directs thatthe FARbe amended within 180 days to mandateafraudreportingrequirementforallcontractsabove$5 million. This bill requires that the fraud reporting regulations applytocontractsperformedoutsideoftheUnitedStatesandto commercialitemcontracts, andgivesclearstatutoryauthorityto require reporting ofviolations offederal criminal law and over chargesinregulations. LEGISLATIVEHISTORY H.R.5712,theClosetheContractorFraudLoopholeAct,wasin- troducedbyRep.PeterWelchonApril3,2008,andwasreferred totheCommitteeonOversightandGovernmentReform. The Subcommittee on GovernmentManagement, Organization, andProcurementheldahearingonH.R.5712onApril 15,2008. Thewitnesses were Paul Denett,AdministratorforFederalPro- curementPolicy,OfficeofManagementandBudget;BarrySabin, DeputyAssistantAttorney General, Criminal Division, U.S. De- partmentofJustice;DavidDrabkin,ActingChiefAcquisitionOffi- cerandSeniorProcurementExecutive,GeneralServicesAdminis- tration;andColleenPreston,ExecutiveVicePresident,Professional ServicesCouncil. TheCommitteeheldamarkuptoconsiderH.R.5712onApril16, 2008,andorderedthebill,asamended,tobefavorablyreportedby voicevote. 20028L)e.tterfromAssistantAttorneyGeneralAliceFishertoGSARegulatorySecretariat(Jan.14, 4 SECTION-BY-SECTION Section1.Shorttitle TheshorttitleofthebillistheClosetheContractorFraudLoop- holeAct. Section2.RevisionoftheFederalAcquisitionRegulation Asamended,this sectionrequiresthattheFederalAcquisition Regulationbeamendedwithin180daystoincludeprovisionsthat require timely notification byfederal contractors ofviolations of federalcriminallaworoverpaymentsinconnectionwiththeaward orperformance ofcovered contracts and subcontracts ofcovered contracts,includingthoseperformedoutsidetheUnitedStatesand thoseforcommercialitems. Section3.Definition Asamended,thissectiondefines"coveredcontract"asanycon- tractin an amountgreaterthan $5,000,000 andmorethan 120 daysinduration. EXPLANATIONOFAMENDMENTS Mr.WaxmanandMr. Davisofferedanamendment, passedby voicevote,toimplementamandatoryfraudreportingrequirement throughrevisionoftheFederalAcquisitionRegulationratherthan directlybystatute. COMMITTEECONSIDERATION OnWednesday,April16,2008,theCommitteemetinopenses- sionandfavorablyorderedH.R.5712tobereported,asamended, totheHousebyavoicevote. ROLLCALLVOTES Norollcallvoteswereheld. APPLICATIONOFLAWTOTHELEGISLATrVEBRANCH Section 102(b)(3)ofPublicLaw 104-1requiresadescriptionof theapplicationofthisbilltothelegislativebranchwherethebill relatestotermsandconditionsofemploymentoraccesstopublic servicesandaccommodations.Thebilldoesnotrelatetoemploy- mentoraccesstopublicservicesandaccommodations. STATEMENTOFOVERSIGHTFINDINGSANDRECOMMENDATIONSOFTHE COMMITTEE ofIrnulceoXmpolfiatnhceeRwuiltehscoflatuhseeH3o(cu)s(1e)ooffRreuplreesXeInItIatainvdesc,latuhseeC(o2m)(mbi)(tl-) tee'soversightfindingsandrecommendationsarereflectedinthe descriptiveportionsofthisreport. STATEMENTOFGENERALPERFORMANCEGOALSANDOBJECTrVES Inaccordancewithclause3(c)(4)ofruleXIIIoftheRulesofthe HouseofRepresentatives,theCommittee'sperformancegoalsand objectivesarereflectedinthedescriptiveportionsofthisreport,in- cludingimprovingcompliancewithfederallaw. 5 CONSTITUTIONALAUTHORITYSTATEMENT Underclause3(d)(1)ofruleXIIIoftheRulesoftheHouseof Representatives, the Committee mustinclude a statementciting thespecificpowersgrantedtoCongresstoenactthelawproposed byH.R.5712.ArticleI,Section8,Clause18oftheConstitutionof theUnitedStatesgrantstheCongressthepowertoenactthislaw. FEDERALADVISORYCOMMITTEEACT TheCommittee findsthatthelegislation doesnotestablish or authorizetheestablishmentofanadvisorycommitteewithinthe definitionof5U.S.C.App.,Section5(b). UNFUNDEDMANDATESSTATEMENT Section423oftheCongressionalBudgetandImpoundmentCon- trolAct(asamendedbySection 101(a)(2)oftheUnfundedMan- datesReformAct,P.L.104—4)requiresastatementonwhetherthe provisionsofthereportincludeunfundedmandates.Incompliance withthisrequirementtheCommitteehasreceivedaletterfromthe CongressionalBudgetOfficeincludedherein. EARMARKIDENTIFICATION H.R.5712doesnotincludeanycongressionalearmarks,limited taxbenefits,orlimitedtariffbenefitsasdefinedinclause9(d),9(e), or9(f)ofruleXXI. COMMITTEEESTIMATE Clause 3(d)(2) ofrule XIII ofthe Rules ofthe House ofRep- resentativesrequiresanestimateandacomparisonbytheCom- mittee ofthe coststhatwouldbe incurred in carryingoutH.R. 5712.However,clause3(d)(3)(B)ofthatruleprovidesthatthisre- quirementdoesnotapplywhentheCommitteehasincludedinits reportatimelysubmittedcostestimateofthebillpreparedbythe DirectoroftheCongressionalBudgetOfficeundersection402of theCongressionalBudgetAct. BUDGETAUTHORITYANDCONGRESSIONALBUDGETOFFICECOST ESTIMATE Withrespecttotherequirementsofclause3(c)(2)ofruleXIIIof theRulesoftheHouseofRepresentativesandsection308(a)ofthe CongressionalBudgetActof1974andwithrespecttorequirements ofclause3(c)(3)ofruleXIIIoftheRulesoftheHouseofRepresent- ativesandsection402oftheCongressionalBudgetActof1974,the CommitteehasreceivedthefollowingcostestimateforH.R.5712 fromtheDirectoroftheCongressionalBudgetOffice: April18,2008. Hon.HenryA.Waxman, Chairman,CommitteeonOversightandGovernmentReform, HouseofRepresentatives,Washington,DC. DearMr.Chairman:Asyourequested,theCongressionalBudg- etOfficehaspreparedtheenclosedcostestimateforH.R.5712,the ClosetheContractorFraudLoopholeAct. 6 toIpfryovoiudewitshhemf.urTthheerCdBeOtaisltsafofncotnhtiasctesitsiMmaattet,hewwePwiiclklfobred.pleased Sincerely, PeterR.Orszag. Enclosure. — H.R.5712 ClosetheContractorFraudLoopholeAct H.R.5712wouldamendtheFederalAcquisitionRegulationpri- marilytorequirecertaincontractorsworkingoutsideoftheUnited StatestonotifythegovernmentofanycriminalviolationsofU.S. laws or any contract overpayments that occur while performing suchcontracts.AccordingtotheOfficeofManagementandBudget tahnedptrhoeceGsesnoefrailmpSleermveicnetsinAgdmsiinmiisltarratrieoqnu,irtehmeenAtdsm.inTihsutsr,atCiBoOniesstiin- matesthatimplementingH.R.5712wouldhavenosignificantim- pactonagencies'spending. Enactingthelegislationcouldincreaserevenuesfromciviland criminal fines that could be imposed on those who violate the amendedregulations.Collectionsofcivilfinesarerecordedinthe budgetasreceipts(thatis,revenues)anddepositedintothegen- eralfundoftheTreasury.Criminalfinesarealsorecordedasre- cienipstusb,swehqiuecnhtayreeardse.poCsBitOedexipnectthsetChraitmaenVyicatddiimtsioFnualndreavnednusepsenotr directspendingassociatedwithcivilandcriminalfineswouldtotal lessthan$500,000eachyear. datTehseabsildlefcionnetdaiinnsthneoUiMntRerAgoavnedrnwmoeunltadlnootrapfrfiecvtatteh-esebctuodrgemtasno-f staTthe,elCocBalO,osrtatfrficbaolntgaocvtefronrmethnitss.estimateisMatthewPickford.The estimatewasapprovedbyPeterH.Fontaine,AssistantDirectorfor BudgetAnalysisDivision. CHANGESINEXISTINGLAWMADEBYTHEBILL,ASREPORTED NochangestoexistinglawaremadebyH.R.5712,asreported. CMSLibrary C2-07-13 7500SecurityBlvd. !Baltimore, Maryiend 21244 ADDITIONALVIEWS IhadseriousconcernsaboutH.R.5712asoriginallyintroduced. Thebillwouldhaveprovidedthataknowingfailuretoreportviola- tionsofcriminallawandoverpaymentsrelatedtoafederalcon- tractcanbeacausefordebarmentorsuspensionforallfirms,in- cludingthoseholdingcontractsperformedoverseasandcontracts forcommercialitems.Itwasanattemptto"strengthen"anethics complianceprogramcurrentlyunderdevelopmentbytheAdminis- tration. Inactuality,thebillasintroduceddidnotmakeassignificanta changeasintendedtothesubstanceoftheproposedrevisionsto theacquisitionregulations.EvenwithoutH.R.5712,theproposed regulationswouldhaveappliedtheenforcementofdebarmentand suspensionforfailuretoreporttoallfirms,includingthoseholding contractsperformedoverseasandcontractsforcommercialitems. The problem was the bill leapfrogged the statutorily-designated processforwritingacquisitionregulationsandwouldhaveencased instatuteanewreportingschemeyettobethoroughlyvetted. The concept ofmandatory reportingby contractors ofpossible criminalviolationsbasedon"reasonablegrounds"isunprecedented andcontroversial. Therulewasthesubjectofmorethe70com- ments.Asexpected,manyofthefirmssubjecttotheruleexpressed seriousandlegitimateconcernsabouttheconceptandthewording oftheproposal. Duringtheonehearingheldbythe SubcommitteeonGovern- ment Management, Organization and Procurement, none ofthe agenciesprovidingtestimony,includingtheDepartmentofJustice, northecontractorcommunity,supportedH.R.5712asintroduced. Instead,thestakeholderssuggestedthewell-establishedregulatory draftingprocessshouldbeallowedtocontinuetocompletion.They favoredthisapproachbecauseitwouldallowallinterestedparties theopportunitytosubmitcommentsandhavethosecommentscon- sideredinthedeliberativeprocess. TheamendmentadoptedbytheCommitteeensurestheFederal AcquisitionRegulationisrevisedtoincludearequirementthatfed- eralcontractorsnotifythegovernmentofviolationsoffederalcrimi- naanlcelaofwcoorntorvaecrtspaoyrmesunbtcsonitnraccotnsne—ctainodniwtiwtihlltehnesaurweartdheorrepgeurlfaotrimo-n iasndaptplhiocsaeblfeortocoamlmlercconitarlacitst,emsi.ncTluhdeinkgeythiossethpeerafmoernmdedmeonvterdsoeeass notmirrortheproposedregulation'spreliminarylanguagebutwill leavetheprecisewordingtotheregulationwriters.Th—estatedpur- poses ofH.R. 5712 ultimately will be accomplished but accom- plishedthroughthemoreappropriateacquisitionrulemakingproc- ess. ThesechangesmakeH.R.5712abetterbill,butnotabillIbe- lieve should be pursued. All interested parties would be better (7) CMSLIBRftRV servediftheCommitteehadspentitstimeatt—emptingtoimprove theoperationofthefederalacquisitionsystem inordertobetter acquirethebestvaluegoodsandservicesthegovernmentsodes- peratelyneeds.Furthermore,theCommitteeshouldhaveallowed theregulatoryprocesstogoforwardwithoutanyinterferenceat all.Nonetheless,underthecircumstances,Iacceptthisbillasan adequatesolution. O