[House Report 110-599]
[From the U.S. Government Publishing Office]
110th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 110-599
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CLOSE THE CONTRACTOR FRAUD LOOPHOLE ACT
_______
April 22, 2008.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Waxman, from the Committee on Oversight and Government Reform,
submitted the following
R E P O R T
together with
ADDITIONAL VIEWS
[To accompany H.R. 5712]
[Including cost estimate of the Congressional Budget Office]
The Committee on Oversight and Government Reform, to whom was
referred the bill (H.R. 5712) to require disclosure by Federal
contractors of certain violations relating to the award or
performance of Federal contracts, having considered the same,
report favorably thereon with an amendment and recommend that
the bill as amended do pass.
CONTENTS
Page
Purpose and Summary.............................................. 2
Background and Need for Legislation.............................. 2
Legislative History.............................................. 3
Section-By-Section............................................... 4
Explanation of Amendments........................................ 4
Committee Consideration.......................................... 4
Rollcall Votes................................................... 4
Application of Law to the Legislative Branch..................... 4
Statement of Oversight Findings and Recommendations of the
Committee...................................................... 4
Statement of General Performance Goals and Objectives............ 4
Constitutional Authority Statement............................... 5
Federal Advisory Committee Act................................... 5
Unfunded Mandates Statement...................................... 5
Earmark Identification........................................... 5
Committee Estimate............................................... 5
Budget Authority and Congressional Budget Office Cost Estimate... 5
Changes in Existing Law Made by the Bill, as Reported............ 6
The amendment is as follows:
Strike all after section 1 and insert the following:
SEC. 2. REVISION OF THE FEDERAL ACQUISITION REGULATION.
The Federal Acquisition Regulation shall be amended within 180 days
after the date of the enactment of this Act pursuant to FAR Case 2007-
006 (as published at 72 Fed Reg. 64019, November 14, 2007) or any
follow-on FAR case to include provisions that require timely
notification by Federal contractors of violations of Federal criminal
law or overpayments in connection with the award or performance of
covered contracts or subcontracts, including those performed outside
the United States and those for commercial items.
SEC. 3. DEFINITION.
In this Act, the term ``covered contract'' means any contract in an
amount greater than $5,000,000 and more than 120 days in duration.
PURPOSE AND SUMMARY
H.R. 5712, the Close the Contractor Fraud Loophole Act, was
introduced by Rep. Peter Welch on April 3, 2008. The bill, as
amended, mandates that the Federal Acquisition Regulation be
amended within 180 days to require contractors to report
violations of federal criminal law and over-payments on
contracts over $5 million, including contracts performed
overseas and commercial item contracts.
BACKGROUND AND NEED FOR LEGISLATION
Each year the federal government spends billions of dollars
to procure goods and services, making federal contracts one of
the fastest growing components of the federal budget. In fiscal
year 2006, the federal government spent over $400 billion
through contracts.
The steady increase in federal spending and recent high-
profile criminal and civil matters involving federal
contractors has heightened the need to detect, investigate, and
prosecute fraud in overseas contracting. This Committee's
investigations have uncovered millions of dollars in wasteful
and fraudulent spending on contracts overseas. To date, the
Department of Justice (DOJ) has charged 46 individuals and
companies for contract fraud relating to contracts in
Afghanistan, Kuwait, and Iraq. However, overseas contracts were
exempted from a proposed rule requiring fraud reporting by
contractors.
On May 23, 2007, DOJ requested that the Federal Acquisition
Regulation be amended to ``require contractors to establish and
maintain internal controls to detect and prevent fraud in their
contracts, and . . . notify contracting officers without delay
whenever they become aware of a contract overpayment or fraud,
rather than wait for its discovery by the government.''\1\ DOJ
believed such a rule was necessary because few government
contractors have complied with the existing voluntary
disclosure program. DOJ proposed specific changes to the
Federal Acquisition Regulation.
---------------------------------------------------------------------------
\1\Letter from Assistant Attorney General Alice Fisher to
Administrator for Federal Procurement Policy Paul Denett (May 23,
2007).
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In response, on November 14, 2007, the Civilian Agency
Acquisition Council and the Defense Acquisition Regulations
Council published a proposed rule on ``Contractor Compliance
Program and Integrity Reporting.'' This rule requires
contractors to have a code of ethics and business conduct, to
establish and maintain specific internal controls to detect and
prevent improper conduct in connection with the award or
performance of government contracts or subcontracts, and to
notify contracting officers without delay whenever they become
aware of violations of federal criminal law with regard to such
contracts or subcontracts.
However, the proposed rule on fraud reporting added two
exemptions not included in the DOJ proposal: an exemption for
contracts to be performed outside of the United States and a
second exemption for contracts for commercial items.
On January 14, 2008, DOJ filed a comment on the proposed
rule stating that ``we do not agree with'' the exemption for
overseas contracts. According to DOJ, ``[a]lthough these
contracts may be performed outside the United States, the
United States still is a party to these contracts and
potentially a victim when overpayments are made or when fraud
occurs in connection with the contracts. Under these
circumstances, the government still maintains jurisdiction to
prosecute the perpetrators of the fraud. Moreover, these types
of contracts, which in many cases support our efforts to fight
the global war on terror, need greater contractor vigilance
because they are performed overseas where U.S. government
resources and remedies are more limited.''\2\ Another comment
filed by the American Bar Association questioned whether the
acquisition councils had statutory authority to create a fraud
reporting requirement by regulation.
---------------------------------------------------------------------------
\2\Letter from Assistant Attorney General Alice Fisher to GSA
Regulatory Secretariat (Jan. 14, 2008).
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H.R. 5712, the Close the Contractor Fraud Loophole Act, as
amended, directs that the FAR be amended within 180 days to
mandate a fraud reporting requirement for all contracts above
$5 million. This bill requires that the fraud reporting
regulations apply to contracts performed outside of the United
States and to commercial item contracts, and gives clear
statutory authority to require reporting of violations of
federal criminal law and over charges in regulations.
LEGISLATIVE HISTORY
H.R. 5712, the Close the Contractor Fraud Loophole Act, was
introduced by Rep. Peter Welch on April 3, 2008, and was
referred to the Committee on Oversight and Government Reform.
The Subcommittee on Government Management, Organization,
and Procurement held a hearing on H.R. 5712 on April 15, 2008.
The witnesses were Paul Denett, Administrator for Federal
Procurement Policy, Office of Management and Budget; Barry
Sabin, Deputy Assistant Attorney General, Criminal Division,
U.S. Department of Justice; David Drabkin, Acting Chief
Acquisition Officer and Senior Procurement Executive, General
Services Administration; and Colleen Preston, Executive Vice
President, Professional Services Council.
The Committee held a markup to consider H.R. 5712 on April
16, 2008, and ordered the bill, as amended, to be favorably
reported by voice vote.
SECTION-BY-SECTION
Section 1. Short title
The short title of the bill is the Close the Contractor
Fraud Loophole Act.
Section 2. Revision of the Federal Acquisition Regulation
As amended, this section requires that the Federal
Acquisition Regulation be amended within 180 days to include
provisions that require timely notification by federal
contractors of violations of federal criminal law or
overpayments in connection with the award or performance of
covered contracts and subcontracts of covered contracts,
including those performed outside the United States and those
for commercial items.
Section 3. Definition
As amended, this section defines ``covered contract'' as
any contract in an amount greater than $5,000,000 and more than
120 days in duration.
EXPLANATION OF AMENDMENTS
Mr. Waxman and Mr. Davis offered an amendment, passed by
voice vote, to implement a mandatory fraud reporting
requirement through revision of the Federal Acquisition
Regulation rather than directly by statute.
COMMITTEE CONSIDERATION
On Wednesday, April 16, 2008, the Committee met in open
session and favorably ordered H.R. 5712 to be reported, as
amended, to the House by a voice vote.
ROLLCALL VOTES
No rollcall votes were held.
APPLICATION OF LAW TO THE LEGISLATIVE BRANCH
Section 102(b)(3) of Public Law 104-1 requires a
description of the application of this bill to the legislative
branch where the bill relates to terms and conditions of
employment or access to public services and accommodations. The
bill does not relate to employment or access to public services
and accommodations.
STATEMENT OF OVERSIGHT FINDINGS AND RECOMMENDATIONS OF THE COMMITTEE
In compliance with clause 3(c)(1) of rule XIII and clause
(2)(b)(1) of rule X of the Rules of the House of
Representatives, the Committee's oversight findings and
recommendations are reflected in the descriptive portions of
this report.
STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES
In accordance with clause 3(c)(4) of rule XIII of the Rules
of the House of Representatives, the Committee's performance
goals and objectives are reflected in the descriptive portions
of this report, including improving compliance with federal
law.
CONSTITUTIONAL AUTHORITY STATEMENT
Under clause 3(d)(1) of rule XIII of the Rules of the House
of Representatives, the Committee must include a statement
citing the specific powers granted to Congress to enact the law
proposed by H.R. 5712. Article I, Section 8, Clause 18 of the
Constitution of the United States grants the Congress the power
to enact this law.
FEDERAL ADVISORY COMMITTEE ACT
The Committee finds that the legislation does not establish
or authorize the establishment of an advisory committee within
the definition of 5 U.S.C. App., Section 5(b).
UNFUNDED MANDATES STATEMENT
Section 423 of the Congressional Budget and Impoundment
Control Act (as amended by Section 101(a)(2) of the Unfunded
Mandates Reform Act, P.L. 104-4) requires a statement on
whether the provisions of the report include unfunded mandates.
In compliance with this requirement the Committee has received
a letter from the Congressional Budget Office included herein.
EARMARK IDENTIFICATION
H.R. 5712 does not include any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9(d), 9(e), or 9(f) of rule XXI.
COMMITTEE ESTIMATE
Clause 3(d)(2) of rule XIII of the Rules of the House of
Representatives requires an estimate and a comparison by the
Committee of the costs that would be incurred in carrying out
H.R. 5712. However, clause 3(d)(3)(B) of that rule provides
that this requirement does not apply when the Committee has
included in its report a timely submitted cost estimate of the
bill prepared by the Director of the Congressional Budget
Office under section 402 of the Congressional Budget Act.
BUDGET AUTHORITY AND CONGRESSIONAL BUDGET OFFICE COST ESTIMATE
With respect to the requirements of clause 3(c)(2) of rule
XIII of the Rules of the House of Representatives and section
308(a) of the Congressional Budget Act of 1974 and with respect
to requirements of clause 3(c)(3) of rule XIII of the Rules of
the House of Representatives and section 402 of the
Congressional Budget Act of 1974, the Committee has received
the following cost estimate for H.R. 5712 from the Director of
the Congressional Budget Office:
April 18, 2008.
Hon. Henry A. Waxman,
Chairman, Committee on Oversight and Government Reform,
House of Representatives, Washington, DC.
Dear Mr. Chairman: As you requested, the Congressional
Budget Office has prepared the enclosed cost estimate for H.R.
5712, the Close the Contractor Fraud Loophole Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Matthew
Pickford.
Sincerely,
Peter R. Orszag.
Enclosure.
H.R. 5712--Close the Contractor Fraud Loophole Act
H.R. 5712 would amend the Federal Acquisition Regulation
primarily to require certain contractors working outside of the
United States to notify the government of any criminal
violations of U.S. laws or any contract overpayments that occur
while performing such contracts. According to the Office of
Management and Budget and the General Services Administration,
the Administration is in the process of implementing similar
requirements. Thus, CBO estimates that implementing H.R. 5712
would have no significant impact on agencies' spending.
Enacting the legislation could increase revenues from civil
and criminal fines that could be imposed on those who violate
the amended regulations. Collections of civil fines are
recorded in the budget as receipts (that is, revenues) and
deposited into the general fund of the Treasury. Criminal fines
are also recorded as receipts, which are deposited in the Crime
Victims Fund and spent in subsequent years. CBO expects that
any additional revenues or direct spending associated with
civil and criminal fines would total less than $500,000 each
year.
The bill contains no intergovernmental or private-sector
mandates as defined in the UMRA and would not affect the
budgets of state, local, or tribal governments.
The CBO staff contact for this estimate is Matthew
Pickford. The estimate was approved by Peter H. Fontaine,
Assistant Director for Budget Analysis Division.
CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
No changes to existing law are made by H.R. 5712, as
reported.
ADDITIONAL VIEWS
I had serious concerns about H.R. 5712 as originally
introduced. The bill would have provided that a knowing failure
to report violations of criminal law and overpayments related
to a federal contract can be a cause for debarment or
suspension for all firms, including those holding contracts
performed overseas and contracts for commercial items. It was
an attempt to ``strengthen'' an ethics compliance program
currently under development by the Administration.
In actuality, the bill as introduced did not make as
significant a change as intended to the substance of the
proposed revisions to the acquisition regulations. Even without
H.R. 5712, the proposed regulations would have applied the
enforcement of debarment and suspension for failure to report
to all firms, including those holding contracts performed
overseas and contracts for commercial items. The problem was
the bill leapfrogged the statutorily-designated process for
writing acquisition regulations and would have encased in
statute a new reporting scheme yet to be thoroughly vetted.
The concept of mandatory reporting by contractors of
possible criminal violations based on ``reasonable grounds'' is
unprecedented and controversial. The rule was the subject of
more the 70 comments. As expected, many of the firms subject to
the rule expressed serious and legitimate concerns about the
concept and the wording of the proposal.
During the one hearing held by the Subcommittee on
Government Management, Organization and Procurement, none of
the agencies providing testimony, including the Department of
Justice, nor the contractor community, supported H.R. 5712 as
introduced. Instead, the stakeholders suggested the well-
established regulatory drafting process should be allowed to
continue to completion. They favored this approach because it
would allow all interested parties the opportunity to submit
comments and have those comments considered in the deliberative
process.
The amendment adopted by the Committee ensures the Federal
Acquisition Regulation is revised to include a requirement that
federal contractors notify the government of violations of
federal criminal law or overpayments in connection with the
award or performance of contracts or subcontracts--and it will
ensure the regulation is applicable to all contracts, including
those performed overseas and those for commercial items. The
key is the amendment does not mirror the proposed regulation's
preliminary language but will leave the precise wording to the
regulation writers. The stated purposes of H.R. 5712 ultimately
will be accomplished--but accomplished through the more
appropriate acquisition rulemaking process.
These changes make H.R. 5712 a better bill, but not a bill
I believe should be pursued. All interested parties would be
better served if the Committee had spent its time attempting to
improve the operation of the federal acquisition system--in
order to better acquire the best value goods and services the
government so desperately needs. Furthermore, the Committee
should have allowed the regulatory process to go forward
without any interference at all. Nonetheless, under the
circumstances, I accept this bill as an adequate solution.