What is Your Corporate Compliance Readiness?

Corporate compliance is not a new concept to the construction industry.  For years, construction companies have been governed by state and federal statues and regulations, and by judicial enforcement, such as environmental laws, OSHA and requirements for workplace safety.Now, however, companies in the industry must realize that the scope of their compliance programs must expand beyond environmental and safety matters. Engineering, architectural and construction firms which do business with government entities, like the Department of Transportation, the Federal Highway Administration and the multitude of federal, state and local agencies that contract with such companies, frequently do not view themselves as “government contractors.” But they are. And as government contractors, the professional services entities are subject to the often mind-boggling array of rules and regulations that govern their relationships with their government clients. 

Unfortunately, included among the teeming array of regulations are many that can expose construction industry companies to criminal and civil fraud prosecutions, multiple penalties, dual prosecutions and investigations at the state and federal levels and can even bar companies from doing business with their long-time customers for months or years at a time. Acts as simple as the miscoding of overhead charges, which result in inaccurate bills to government customers, can be classified as false claims under certain circumstances. Wining and dining customers and potential customers, which may be perfectly legal in a purely commercial, non-governmental context, could be illegal bribes or gratuities under federal and some state laws.

How can companies protect themselves against potential violations and the costs of internal investigations, responding to government investigators and auditors, penalties and other costs of resolving government enforcement actions? The most cost-effective solution is for companies to adopt and implement or to enhance existing compliance and ethics programs. Guidance from a recent federal court case involving a pharmaceutical company is also relevant to construction companies that have government contracts or receive federal or state funds. The message is to make sure that they have “effective” compliance and ethics programs. 

In United States v. Merck-Medco Managed Care, LLC, [1] a federal court held that even though a company’s upper management apparently had no actual knowledge that the company was submitting false claims to the government, the absence of an effective corporate compliance program could be sufficient proof that the company “knowingly” submitted false claims to the government, therefore, violating the False Claims Act (FCA). The False Claims Act is a law that provides the government with powerful tools to combat fraud, waste and abuse by recipients of federal funds.  Under the FCA, a company that “knowingly” submits false claims to the government can be liable for three times the actual damages suffered by the government, plus additional penalties of up to $11,000 per claim. 

What makes the FCA particularly risky is that the term “knowingly” does not necessarily mean actual knowledge. Instead, a company can violate the FCA if it is found to have acted in “reckless disregard” or “deliberate ignorance” of the truth or falsity of its claims-a much easier legal standard for the government to meet. Because of this loosened “knowledge” requirement, companies which are merely sloppy or careless in the preparation of claims can get caught in the middle of complex litigation and incur substantial liability, even though they intended no wrongdoing. 

In the Medco case, the government set forth a laundry list of actions that Medco failed to take, and it is no coincidence that the government’s list mirrors the elements of an effective compliance program under guidance from the U.S. Sentencing Commission, which is the recognized standard for an effective compliance program. The government claimed that Medco Health’s board and officers acted with reckless disregard of the truth or falsity of its claims because they failed to:

• Establish an effective code of ethics
• Designate specific high-level personnel with direct responsibility for overseeing compliance who had direct access to the CEO and board of directors
• Appoint a compliance officer with responsibility for independently investigating and acting on matters related to compliance
• Inform employees of the existence and details of the company’s compliance program
• Arrange for regular reports to the board concerning internal investigations
• Establish effective methods of monitoring, auditing or reporting on compliance, including, without limitation, establishing an anonymous hotline and providing protection for whistleblowers
• Implement systems to assure reasonable steps to respond to or investigate reported violations
• Consistently enforce the company’s policies and procedures through corrective action

The Medco case is significant because it is the first time a federal court has held that the mere lack of an effective compliance program, without more, is sufficient to establish that a company “knowingly” submitted false claims under the FCA. At a minimum, a company that receives any funding from the government and that has a substandard compliance and ethics program faces an increased risk of becoming entangled in a costly litigation in the event the government discovers the company has submitted false claims. This includes construction companies that contract with the government. 

The Boeing Company is another example of an apparently good company with a strong reputation for good work and integrity and highly knowledgeable about government contracts that got into big trouble for compliance failures. In January 2006, at a Boeing leadership meeting, Boeing’s executive vice president and general counsel laid out in very clear and powerful language the reasons why Boeing should have paid more attention to its compliance and ethics requirements. After six years of federal investigations, he reported that “The U.S. attorney in Los Angeles is looking at indicting Boeing for violations of the Economic Espionage Act, the Procurement Integrity Act, the False Claims Act and the Major Frauds Act…The U.S. Attorney in Alexandria, VA, is looking at indicting us for violation of the conflict-of-interest laws. And both are looking to throw in a few conspiracy and aiding-and-abetting charges for good measure.” 

The costs outlined by Boeing’s general counsel, in terms of fines, penalties and lost business, suspension from major government contracts, as well as damage to reputation and the potential for future impact on contractor integrity scoring, reaches into the billions of dollars. Furthermore, he said it demonstrates the imperative for any government contractor to have rigorous compliance and ethics programs supported from the top all the way down to line employees. Contracting agencies do not want to be embarrassed. They want comfort that their contractors will help prevent problems, and if they do occur, the company will resolve them appropriately and self-report when required. A culture of compliance and integrity, with no tolerance for violations, must be developed and enforced. 

Construction companies have suffered similar kinds of investigations and penalties. For example, Redondo Construction Company, a major contractor in Puerto Rico, pled guilty to several criminal offenses, paid more than a million dollars in fines and was debarred from receiving future government contracts, following an investigation by the Federal Highway Administration and the Department of Justice. Redondo was also required to implement a corporate compliance program as part of the settlement. In addition, the increased scrutiny of construction firms that have contracts with the military in Iraq or with FEMA relating to the clean-up after Hurricane Katrina make it even more imperative for companies to have good compliance programs.

Developing an Effective Corporate Compliance Program

A compliance program is essentially a framework of internal controls that are designed to make sure the company is making efforts at “doing the right thing” and following their business and ethical codes of conduct. A well-organized and developed corporate compliance program can provide a competitive advantage. Regulators, investors and lawmakers have come to expect that organizations will take the necessary steps and invest in a compliance program that is suited for their business. In addition, an effective corporate compliance program supports a corporate culture where employees are vested and interested in the success of the company. 

The elements for an effective compliance program are set forth in the U.S. Sentencing Commission guidance on compliance and ethics programs, which is widely recognized as the bellwether standard for corporate compliance programs in the United States. The U.S. Department of Transportation (DOT) has also issued a Corporate Compliance Program Guide that sets forth specific elements of an effective corporate compliance program on their website. It recommends the following:

1. The company’s governing authority must fully support all elements of the corporate compliance program
2. Designate a corporate compliance officer for managing the responsibility of the day-to-day  administration
3. Develop a Code of Ethical Conduct training program and include legal training on antitrust, employment and environmental compliance
4. Develop a confidential employee handbook
5. Develop a procedure for investigating for suspected violations
6. Implement a schedule of auditing company’s internal accounting procedures
7. Dedicate appropriate funding for implementing the corporate compliance
8. Develop a control procedure for addressing violations of the corporate compliance programs

The DOT Recommends the Following for an Effective Corporate Compliance Program

1. The company’s governing authority must fully support all elements of the corporate compliance program
2. Designate a corporate compliance officer for managing the responsibility of the day-to-day administration
3. Develop a Code of Ethical Conduct training program and include legal training on antitrust, employment and environmental compliance
4. Develop a confidential employee handbook
5. Develop a procedure for investigating for suspected violations
6. Implement a schedule of auditing company’s internal accounting procedures
7. Dedicate appropriate funding for implementing the corporate compliance
8. Develop a control procedure for addressing violations of the corporate compliance programs

The significant benefits which can flow from an effective and comprehensive compliance program now far outweigh the comparatively low cost of a compliance program. As the recent cases graphically demonstrate, failures in compliance can significantly disrupt an organization’s business operations, undermine reputations and adversely affect market value, not to mention the potential for massive fines, prison terms for executives, liability for members of the board of directors and other problems. 

Merely responding to an investigation into potential violations can be costly, even if the government ultimately does not take action against the business entity. Good corporate governance principles, including implementing an effective compliance and ethics programs are the most cost-effective actions an organization can take to avoid an investigation. While having such a program will not guarantee that statutes and regulations will not be violated, a well-implemented program will afford a company the opportunity to detect, deter or minimize the impact of wrongdoing at an early stage, the opportunity to correct the problem before the government becomes involved, and in most instances, it will help avoid both civil and criminal prosecution altogether.

[1]  336 F.Supp.2d 430, 440-41 (E.D.Pa. 2004).

Construction Business Owner, March 2007