On September 19, the Government Accountability Office (GAO) issued a report highlighting a gap in current Organizational Conflicts of Interest (OCIs) restrictions. According to the report, the Federal Acquisition Regulation (FAR) does not adequately address how contracting officers should consider bids from contractors who engage in contracting activities with the government of China and other countries of concern.
For example, according to the GAO, since 2008, McKinsey & Co. has received over $851 million in contracts from the U.S. government to modernize naval shipyards and advise on weapons budgets while simultaneously accepting contracts with Chinese state-run enterprises supporting China’s naval buildup. With intimate knowledge of some of the most closely held secrets in the U.S. military, some members of Congress, along with a growing number of government contracts and national security experts, believe consultants working with Chinese military companies pose a considerable risk to U.S. national security.
Types of OCIs
The conflicts created by consulting companies working both for the U.S. government and for adversarial countries, which is really as much a national security concern as a traditional OCI, does not fit squarely into any of the three general types of OCIs:
- Impaired objectivity: This OCI arises in circumstances where a contractor is in a position to evaluate itself or makes recommendations as to current or future procurement priorities. GAO will look to “whether a firm is in a position to make judgments or recommendations that would have the effect of directly influencing its own wellbeing.” L-3 Services Inc., B-400134.11 et al., Sept. 3, 2009, 2009 CPD ¶ 171.
- Biased ground rules: This OCI arises from situations where the contractor has somehow influenced the ground rules for the procurement, e.g., preparing statements of work or procurement requirements.
- Unequal access to information: This OCI arises from a contractor’s performance under one contract, which provides the contractor with information that is not publicly available, giving it an unfair competitive advantage. This may include the improper disclosure of source selection information.
However, agencies are generally granted broad discretion both when evaluating whether an OCI exists and, if it does, what type of mitigation is sufficient. FAR 9.504 only requires a contracting office (CO) to “identify and evaluate potential organizational conflicts of interest as early in the acquisition process as possible; and avoid, neutralize, or mitigate significant potential conflicts before contract award.” COs largely rely on contractors to disclose facts related to potential OCIs.
In addition, there is no standard OCI solicitation provision for COs to use. Instead, agencies have developed their own provisions leading to a patchwork of confusing requirements.
OCI requirements are not toothless, however. Contractors who fail to disclose required information may result in the termination of the contract, suspension or debarment, or even charges related to making false statements. Prosecutors may also bring charges related to the False Claims Act which may result in civil and/or criminal liability.
Grant Regulations Are Ahead of the Game
It is unclear why this potential gap in OCI restrictions for contractors has not yet been closed. Four years ago concerns about exploitation of research funded by U.S. grants resulted in legislation that has been implemented, mandating disclosure of funding by foreign entities as well as prohibitions against persons participating in foreign government-sponsored talent recruitment programs of foreign countries of risk (currently Iran, North Korea, Russia, and China).
Specifically, Section 223 of the Fiscal Year 2021 National Defense Authorization Act requires covered individuals to disclose “the amount, type, and source of all current and pending research support received by, or expected to be received by, the individual.” In addition, failure to comply with these requirements may result in the rejection of the grant application, a suspension of funding, or another enforcement action.
This has long been a priority of the U.S. government, particularly as it relates to Chinese funding of U.S. researchers. In 2021, the Biden White House issued a memorandum directing federal agencies to strengthen protections of government funded research and development from being exploited by foreign countries. A year later, the White House Office of Science & Technology released guidance to implement those protections. Simultaneously, the government’s enforcement agencies have brought criminal charges against grant awardees who have misrepresented foreign affiliations such as Charles Lieber, the former Chair of Harvard University’s Chemistry and Chemical Biology Department, who lied to federal authorities about his affiliation with a Chinese talent recruitment program.
Recent Committee Hearing
On September 24, the Senate Homeland Security and Government Affairs Committee held a hearing entitled “Safeguarding the Homeland: Examining Conflicts of Interest in Federal Contracting to Protect America’s Future” which examined the risks associated with inadequate safeguards around OCIs. Jessica Tillipman, Associate Dean for Government Law Studies at the George Washington University Law School, made her case for reform calling the “current framework governing OCIs . . . 1) outdated, 2) inconsistent with modern procurement practices, and 3) [inadequate] to address the growing risks associated with the government’s increasing reliance on contractors to provide services which include advice and the exercise of judgment.”
Thankfully, help is on the way.
Preventing Organizational Conflicts of Interest in Federal Acquisition Act
On December 27, 2022, President Biden signed the Preventing Organizational Conflicts of Interest in Federal Acquisition Act into law. The law requires the FAR Council to update the FAR by providing definitions and guidance related to OCIs. In addition, the law requires the FAR council to provide illustrative examples of certain contractor relationships with foreign entities that may give rise to OCIs. The draft rules are currently in the internal review process and should be made available soon.
In addition, legislation has been proposed in the Senate that takes aim at consulting firms that do business with China. Senator Hawley’s Time to Choose Act would prohibit federal agencies from contracting with consulting firms who also contract with the Chinese government, the Chinese Communist Party, or any its subsidiaries or affiliates. The legislation would also impose significant penalties on those firms that hide or misrepresent contracts with Chinese entities.
Going Forward
Given the lack of adequate guidance around OCIs, agencies have unevenly applied OCI prohibitions to contractors. Contractors, especially those in the consulting sector, have developed large books of business that may present OCI issues. With a new proposed rule imminent and legislation pending, contractors should closely examine the new requirements once it is promulgated.
