A Practical Guide to Contractor Code of Business Ethics and Conduct and Corporate Compliance Programs

January 1, 2010

By: John A. Leonard

What is the difference between a Code of Business Ethics and Conduct and a Corporate Compliance Program?

For many years, prudent companies that are highly regulated or exposed to civil or criminal liability because of the industry in which they operate have had corporate compliance programs to avoid or minimize risk. Recently, companies have adopted specific compliance programs called Code of Business Ethics and Conduct.

Why should a Company have a Contractor Code of Business Ethics and Conduct?

It may be required by law. Many state and federal laws require that a Company have a Code of Business Ethics and Conduct. The Federal Acquisition Regulations (FAR) is a well-known example.

It may be required by business partners. Even in cases where a Code of Business Ethics and Conduct is not technically required by law, it may be a practical requirement in order to do business. For example, businesses that may be small, and therefore exempt from federal requirements to establish a Code of Business Ethics and Conduct, may nevertheless be required as a practicality when sub-contracting with larger businesses that require a code for all of its sub-contractors.

It may be prudent because of potential liability. Companies that could incur civil or criminal liability due to their industry find it prudent to adopt a Code of Business Ethics and Conduct. Under the U.S. Federal Sentencing Guidelines, companies can hopefully avoid liability or lessen its severity by adopting an appropriate Code of Business Ethics and/or compliance program. Companies that are willfully ignorant of a violation of law run the risk of additional civil or criminal liability.

What are typical provisions?

For all companies. A policy statement which sets forth why the Code is being adopted, a company commitment which specifically states areas of specific concern (usually the substantive laws, discussed below), consequences of an employee’s failure to comply and how employees can report breaches of the Code.

For companies that contract with the federal government. If a company has a government contract, the fine print that incorporates provisions by reference will contain a variety of clauses from Section 52 of the FAR. In general, these companies should adopt specific provisions that mirror those Section 52 provisions, including kick-backs, gratuities, contingent fees, etc.

For companies that bill the government for goods and services. These companies must contend with the False Claims Act. The Act is extremely broad and it is very important that companies provide a specific section that prohibit the following:

  • billing for goods or services that were never delivered or performed;
  • billing for tests that were not performed;
  • billing for one grade of equipment, but actually providing inferior equipment;
  • defective testing and certifying something has passed a test when it has not;
  • double billing;
  • doctored timeslips;
  • being over-paid by the government and not reporting that over-payment;
  • failing to report known product defects in order to be able to continue to sell or bill the government;
  • billing for research that was never conducted.

Companies that export. These companies should have provisions that deal with the Foreign Corrupt Practices Act, Anti-Boycott Law and have a separate and detailed export management system that addresses both the Department of Commerce Export Administration Regulations and the Department of State International Traffic and Arms Regulations (ITAR).

Companies that may have criminal or civil liability due to state or federal law. Companies that are highly regulated or otherwise may have liability due to a particular industry should provide sections in their Code that addresses how to avoid liability and otherwise comply with applicable laws.

How should a Company establish a Code of Ethics and Compliance Program?

  • The Company’s Board of Directors must adopt the Code or Program and exercise reasonable oversight.
  • High-level personnel in the Company must exercise reasonable oversight.
  • The Company must communicate the Code or Program to its employees and, any affected agents or independent contractors.
  • The Company must monitor and periodically audit the Code or Program.
  • The Company must periodically evaluate the Code or Program.

This Article is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.

Copyright © 2010 Fairfield and Woods, P.C., ALL RIGHTS RESERVED.

Comments or inquiries may be directed to:

John A. Leonard.