The Mandatory Disclosure Rule – Demystifying Your Disclosure Requirements

September 9, 2015

By Kathryn V. Flood

It’s that gut-check scenario: You realize that your company has made a mistake on an invoice submitted on a government contract, or that your company has mistakenly represented its size or socioeconomic status. Regardless of what shape the mistake has taken, you are wondering how best to limit your company’s potential exposure. You also wonder, as a small business, what exactly you are required to disclose to the government. This is where the Mandatory Disclosure Rule (MDR) comes in to play.

MDR obligations derive from two, separate sets of FAR requirements: (1) FAR Clause 52.203-13, “Contractor Code of Business Ethics and conduct,” which the government is required to insert in all “covered” contracts and subcontracts pursuant to FAR 3.1004; and (2) Debarment and Suspension (Present Responsibility) considerations in FAR 9.406-2 and 9.407-2.

“Covered” contracts requiring the incorporation of FAR 52.203-13 are those that are expected to exceed $5 million and consume 120 days or more to perform. Small businesses and contractors providing commercial items are exempt from a set of requirements in clause 52.203-13 relating to implementation of internal controls and compliance initiatives. However, under the MDR, all government contractors of any size or type are subject to the Present Responsibility (debarment/suspension) provisions set out in FAR 3.1003, 9.406-2, and 9.407-2.

Any government contractor and its “principals” can be debarred or suspended for failing to meet these requirements. So, as read literally, the FAR Present Responsibility provisions do not impose an affirmative obligation or “requirement” to disclose on contractors, i.e., contractors are not required by the suspension/debarment provisions to make disclosures. However, contractors are required by FAR 3.1003(a)(2) and implementing provisions to make disclosures of “credible evidence of a violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code or a violation of the False Claims Act.”

Additionally, FAR 3.1003(a)(2)(b) states that the Payment clauses at FAR 52.212-4(i)(5), 52.232-25(d), 52.232-26(c), and 52.232-27(l) require that, if the contractor becomes aware that the government has overpaid on a contract financing or invoice payment, the contractor shall remit the overpayment amount to the government.

A contractor may be suspended and/or debarred for a knowing failure by a principal to timely disclose credible evidence of a significant overpayment, other than overpayments resulting from contract financing payments as defined in FAR 32.001 (see FAR 9.406-2(b)(1)(vi) and 9.407-2(a)(8)).

Therefore, the MDR places the burden on contractors to determine when a disclosure is required. The MDR requires reporting of three separate, but potentially overlapping types of conduct: (1) violation of certain criminal law; (2) violation of the civil False Claims Act; and (3) receipt of a significant overpayment.

The civil False Claims Act, 31 U.S.C. § 3729 et seq., generally provides that an entity submits a false claim when it “knowingly presents, or causes to be presented, a false or fraudulent claim for approval,” “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim,” and/or “conspires to commit a violation” of any of the other substantive liability provisions of the False Claims Act. While the universe of False Claims Act violations that must be disclosed is difficult to quantify, the False Claims Act establishes civil liability for the following acts:

  • The knowing submission to the government of a false or fraudulent claim;
  • The knowing submission of a false statement in support of a claim;
  • A conspiracy to defraud the government regarding a claim;
  • The willful concealment of government property or delivery of less property than the amount for which the individual receives a receipt;
  • The knowing delivery of a false receipt of property used or to be used by the government;
  • The knowing purchase or receipt of public property from a government employee not authorized to sell it; and
  • The knowing submission of a false statement to reduce an obligation owed the United States.

31 U.S.C. § 3729(a). The term “knowing” includes actual knowledge, deliberate ignorance, and reckless disregard for the truth or the falsity of the information, but it does not include innocent mistakes or negligence. Id., § 3729(b).

The term “principal” is used in the present responsibility portions of the MDR clause found at FAR 52.203-13. It is a “principal’s” knowledge of a potential violation that subjects the contractor to possible suspension or debarment for nondisclosure. The MDR defines the term “principal” as an officer, director, owner, partner, or a person having primary management or cause for suspension and/or debarment until 3 years after final payment on a contract (see FAR 9.406-2(b)(1)(vi) and 9.407-2(a)(8)). Id.

Additionally, FAR 3.1003(a)(2)(b) states that the Payment clauses at FAR 52.212-4(i)(5), 52.232-25(d), 52.232-26(c), and 52.232-27(l) require that, if the contractor becomes aware that the government has overpaid on a contract financing or invoice payment, the contractor shall remit the overpayment amount to the government. A contractor may be suspended and/or debarred for a knowing failure by a principal to timely disclose credible evidence of a significant overpayment, other than overpayments resulting from contract financing payments as defined in 32.001 (see FAR 9.406-2(b)(1)(vi) and 9.407-2(a)(8)).

As you can see, many issues come in to play regarding whether or not a contractor is required to make a disclosure under the MDR, and it is often a very fact-driven analysis. If you have questions regarding a potential disclosure, it’s best to seek advice of counsel, and walk through the specific facts of your case.

About the Author: Katie Flood is an associate with PilieroMazza in the Government Contracts Group. She may be reached at kflood@pilieromazza.com.

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