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Posted on Tuesday, October 15, 2013

Government Contractor Can Be Penalized for Kickbacks Employees Receive Even If the Company Has No Knowledge of the Kickbacks

Mandatory Anti-Kickback Act procedures will not protect a government contractor from paying civil penalties for kickbacks given by subcontractors to company employees, under the Anti-Kickback Act (AKA), 41 U.S.C. 8701-07. A company is liable for kickbacks its employees receive regardless of whether the company was aware of or profited from the kickbacks. The decision shows the need for government contractors to closely monitor their employees’ compliance with company AKA procedures required by FAR 3.502-3.

A kickback can take many forms including money, football tickets, or anything of value that a subcontractor gives back to a prime contractor in exchange for something of value, like undeserved good past performance ratings.

The rationale for prohibiting kickbacks is not only that they poison the procurement system – they also needlessly raise the price the government pays the prime who in turn pays the subcontractor: since the kickback is ultimately government money, kickbacks cost the government needless expense.

The decision involved Kellogg Brown and Root (KBR)’s ID/IQ contracts with the U.S. Army for transporting military equipment and supplies to Iraq, Afghanistan and Kuwait between 2002 and 2006. The work could be done by KBR or by subcontractors that KBR selected. Two of the subcontractors gave a KBR supervisor and his colleagues meals, drinks, golf outings, tickets to rodeo events and other gifts and entertainment. In exchange, the KBR employees overlooked performance failures of the subcontractors, and continued to give them new subcontracts despite the failures.

After the government joined in a qui tam (whistleblower) lawsuit against KBR and the employees, KBR asked the court to throw the case out, arguing that the AKA did not allow corporate officials to be responsible for acts of the employees, that is, the company had no “vicarious liability” for what its employees did behind the scenes. The District Court agreed with KBR and threw the lawsuit out but the government appealed and won, keeping the case alive.

The appeals court focused first on the AKA’s definition of “person” who could be liable under the Act. The Act defined “person” broadly to include corporations and other business entities.  Thus, since the AKA “makes corporations liable for kickback activity, it requires attributing liability to corporate entities for that activity under a rule of vicarious liability.”

This decision shows why all government contractors must monitor their employees’ compliance with company Anti-Kickback procedures required by FAR 3.502-3 and FAR 52.203-7. Berenzweig Leonard LLP can provide your company with contract compliance guidance as well as white-collar defense strategies to help you comply with legal provisions such as the AKA.

John Polk is a former Assistant U.S. Attorney and handles contract compliance and white-collar issues for the firm. Terry O’Connor has over 40 years of government contract experience in all aspects of contract compliance.  Berenzweig Leonard can help government contractors avoid not only AKA penalties but also avoid being found non-responsible due to kickbacks.  John can be reached at jpolk@berenzweiglaw.com.

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