```

[House Report 110-599]
[From the U.S. Government Publishing Office]

110th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     110-599

======================================================================

 
                CLOSE THE CONTRACTOR FRAUD LOOPHOLE ACT

                                _______
                                

 April 22, 2008.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

  Mr. Waxman, from the Committee on Oversight and Government Reform, 
                        submitted the following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                        [To accompany H.R. 5712]

      [Including cost estimate of the Congressional Budget Office]

  The Committee on Oversight and Government Reform, to whom was 
referred the bill (H.R. 5712) to require disclosure by Federal 
contractors of certain violations relating to the award or 
performance of Federal contracts, having considered the same, 
report favorably thereon with an amendment and recommend that 
the bill as amended do pass.

                                CONTENTS

                                                                   Page
Purpose and Summary..............................................     2
Background and Need for Legislation..............................     2
Legislative History..............................................     3
Section-By-Section...............................................     4
Explanation of Amendments........................................     4
Committee Consideration..........................................     4
Rollcall Votes...................................................     4
Application of Law to the Legislative Branch.....................     4
Statement of Oversight Findings and Recommendations of the 
  Committee......................................................     4
Statement of General Performance Goals and Objectives............     4
Constitutional Authority Statement...............................     5
Federal Advisory Committee Act...................................     5
Unfunded Mandates Statement......................................     5
Earmark Identification...........................................     5
Committee Estimate...............................................     5
Budget Authority and Congressional Budget Office Cost Estimate...     5
Changes in Existing Law Made by the Bill, as Reported............     6

  The amendment is as follows:
  Strike all after section 1 and insert the following:

SEC. 2. REVISION OF THE FEDERAL ACQUISITION REGULATION.

  The Federal Acquisition Regulation shall be amended within 180 days 
after the date of the enactment of this Act pursuant to FAR Case 2007-
006 (as published at 72 Fed Reg. 64019, November 14, 2007) or any 
follow-on FAR case to include provisions that require timely 
notification by Federal contractors of violations of Federal criminal 
law or overpayments in connection with the award or performance of 
covered contracts or subcontracts, including those performed outside 
the United States and those for commercial items.

SEC. 3. DEFINITION.

  In this Act, the term ``covered contract'' means any contract in an 
amount greater than $5,000,000 and more than 120 days in duration.

                          PURPOSE AND SUMMARY

    H.R. 5712, the Close the Contractor Fraud Loophole Act, was 
introduced by Rep. Peter Welch on April 3, 2008. The bill, as 
amended, mandates that the Federal Acquisition Regulation be 
amended within 180 days to require contractors to report 
violations of federal criminal law and over-payments on 
contracts over $5 million, including contracts performed 
overseas and commercial item contracts.

                  BACKGROUND AND NEED FOR LEGISLATION

    Each year the federal government spends billions of dollars 
to procure goods and services, making federal contracts one of 
the fastest growing components of the federal budget. In fiscal 
year 2006, the federal government spent over $400 billion 
through contracts.
    The steady increase in federal spending and recent high-
profile criminal and civil matters involving federal 
contractors has heightened the need to detect, investigate, and 
prosecute fraud in overseas contracting. This Committee's 
investigations have uncovered millions of dollars in wasteful 
and fraudulent spending on contracts overseas. To date, the 
Department of Justice (DOJ) has charged 46 individuals and 
companies for contract fraud relating to contracts in 
Afghanistan, Kuwait, and Iraq. However, overseas contracts were 
exempted from a proposed rule requiring fraud reporting by 
contractors.
    On May 23, 2007, DOJ requested that the Federal Acquisition 
Regulation be amended to ``require contractors to establish and 
maintain internal controls to detect and prevent fraud in their 
contracts, and . . . notify contracting officers without delay 
whenever they become aware of a contract overpayment or fraud, 
rather than wait for its discovery by the government.''\1\ DOJ 
believed such a rule was necessary because few government 
contractors have complied with the existing voluntary 
disclosure program. DOJ proposed specific changes to the 
Federal Acquisition Regulation.
---------------------------------------------------------------------------
    \1\Letter from Assistant Attorney General Alice Fisher to 
Administrator for Federal Procurement Policy Paul Denett (May 23, 
2007).
---------------------------------------------------------------------------
    In response, on November 14, 2007, the Civilian Agency 
Acquisition Council and the Defense Acquisition Regulations 
Council published a proposed rule on ``Contractor Compliance 
Program and Integrity Reporting.'' This rule requires 
contractors to have a code of ethics and business conduct, to 
establish and maintain specific internal controls to detect and 
prevent improper conduct in connection with the award or 
performance of government contracts or subcontracts, and to 
notify contracting officers without delay whenever they become 
aware of violations of federal criminal law with regard to such 
contracts or subcontracts.
    However, the proposed rule on fraud reporting added two 
exemptions not included in the DOJ proposal: an exemption for 
contracts to be performed outside of the United States and a 
second exemption for contracts for commercial items.
    On January 14, 2008, DOJ filed a comment on the proposed 
rule stating that ``we do not agree with'' the exemption for 
overseas contracts. According to DOJ, ``[a]lthough these 
contracts may be performed outside the United States, the 
United States still is a party to these contracts and 
potentially a victim when overpayments are made or when fraud 
occurs in connection with the contracts. Under these 
circumstances, the government still maintains jurisdiction to 
prosecute the perpetrators of the fraud. Moreover, these types 
of contracts, which in many cases support our efforts to fight 
the global war on terror, need greater contractor vigilance 
because they are performed overseas where U.S. government 
resources and remedies are more limited.''\2\ Another comment 
filed by the American Bar Association questioned whether the 
acquisition councils had statutory authority to create a fraud 
reporting requirement by regulation.
---------------------------------------------------------------------------
    \2\Letter from Assistant Attorney General Alice Fisher to GSA 
Regulatory Secretariat (Jan. 14, 2008).
---------------------------------------------------------------------------
    H.R. 5712, the Close the Contractor Fraud Loophole Act, as 
amended, directs that the FAR be amended within 180 days to 
mandate a fraud reporting requirement for all contracts above 
$5 million. This bill requires that the fraud reporting 
regulations apply to contracts performed outside of the United 
States and to commercial item contracts, and gives clear 
statutory authority to require reporting of violations of 
federal criminal law and over charges in regulations.

                          LEGISLATIVE HISTORY

    H.R. 5712, the Close the Contractor Fraud Loophole Act, was 
introduced by Rep. Peter Welch on April 3, 2008, and was 
referred to the Committee on Oversight and Government Reform.
    The Subcommittee on Government Management, Organization, 
and Procurement held a hearing on H.R. 5712 on April 15, 2008. 
The witnesses were Paul Denett, Administrator for Federal 
Procurement Policy, Office of Management and Budget; Barry 
Sabin, Deputy Assistant Attorney General, Criminal Division, 
U.S. Department of Justice; David Drabkin, Acting Chief 
Acquisition Officer and Senior Procurement Executive, General 
Services Administration; and Colleen Preston, Executive Vice 
President, Professional Services Council.
    The Committee held a markup to consider H.R. 5712 on April 
16, 2008, and ordered the bill, as amended, to be favorably 
reported by voice vote.

                           SECTION-BY-SECTION

Section 1. Short title

    The short title of the bill is the Close the Contractor 
Fraud Loophole Act.

Section 2. Revision of the Federal Acquisition Regulation

    As amended, this section requires that the Federal 
Acquisition Regulation be amended within 180 days to include 
provisions that require timely notification by federal 
contractors of violations of federal criminal law or 
overpayments in connection with the award or performance of 
covered contracts and subcontracts of covered contracts, 
including those performed outside the United States and those 
for commercial items.

Section 3. Definition

    As amended, this section defines ``covered contract'' as 
any contract in an amount greater than $5,000,000 and more than 
120 days in duration.

                       EXPLANATION OF AMENDMENTS

    Mr. Waxman and Mr. Davis offered an amendment, passed by 
voice vote, to implement a mandatory fraud reporting 
requirement through revision of the Federal Acquisition 
Regulation rather than directly by statute.

                        COMMITTEE CONSIDERATION

    On Wednesday, April 16, 2008, the Committee met in open 
session and favorably ordered H.R. 5712 to be reported, as 
amended, to the House by a voice vote.

                             ROLLCALL VOTES

    No rollcall votes were held.

              APPLICATION OF LAW TO THE LEGISLATIVE BRANCH

    Section 102(b)(3) of Public Law 104-1 requires a 
description of the application of this bill to the legislative 
branch where the bill relates to terms and conditions of 
employment or access to public services and accommodations. The 
bill does not relate to employment or access to public services 
and accommodations.

  STATEMENT OF OVERSIGHT FINDINGS AND RECOMMENDATIONS OF THE COMMITTEE

    In compliance with clause 3(c)(1) of rule XIII and clause 
(2)(b)(1) of rule X of the Rules of the House of 
Representatives, the Committee's oversight findings and 
recommendations are reflected in the descriptive portions of 
this report.

         STATEMENT OF GENERAL PERFORMANCE GOALS AND OBJECTIVES

    In accordance with clause 3(c)(4) of rule XIII of the Rules 
of the House of Representatives, the Committee's performance 
goals and objectives are reflected in the descriptive portions 
of this report, including improving compliance with federal 
law.

                   CONSTITUTIONAL AUTHORITY STATEMENT

    Under clause 3(d)(1) of rule XIII of the Rules of the House 
of Representatives, the Committee must include a statement 
citing the specific powers granted to Congress to enact the law 
proposed by H.R. 5712. Article I, Section 8, Clause 18 of the 
Constitution of the United States grants the Congress the power 
to enact this law.

                     FEDERAL ADVISORY COMMITTEE ACT

    The Committee finds that the legislation does not establish 
or authorize the establishment of an advisory committee within 
the definition of 5 U.S.C. App., Section 5(b).

                      UNFUNDED MANDATES STATEMENT

    Section 423 of the Congressional Budget and Impoundment 
Control Act (as amended by Section 101(a)(2) of the Unfunded 
Mandates Reform Act, P.L. 104-4) requires a statement on 
whether the provisions of the report include unfunded mandates. 
In compliance with this requirement the Committee has received 
a letter from the Congressional Budget Office included herein.

                         EARMARK IDENTIFICATION

    H.R. 5712 does not include any congressional earmarks, 
limited tax benefits, or limited tariff benefits as defined in 
clause 9(d), 9(e), or 9(f) of rule XXI.

                           COMMITTEE ESTIMATE

    Clause 3(d)(2) of rule XIII of the Rules of the House of 
Representatives requires an estimate and a comparison by the 
Committee of the costs that would be incurred in carrying out 
H.R. 5712. However, clause 3(d)(3)(B) of that rule provides 
that this requirement does not apply when the Committee has 
included in its report a timely submitted cost estimate of the 
bill prepared by the Director of the Congressional Budget 
Office under section 402 of the Congressional Budget Act.

     BUDGET AUTHORITY AND CONGRESSIONAL BUDGET OFFICE COST ESTIMATE

    With respect to the requirements of clause 3(c)(2) of rule 
XIII of the Rules of the House of Representatives and section 
308(a) of the Congressional Budget Act of 1974 and with respect 
to requirements of clause 3(c)(3) of rule XIII of the Rules of 
the House of Representatives and section 402 of the 
Congressional Budget Act of 1974, the Committee has received 
the following cost estimate for H.R. 5712 from the Director of 
the Congressional Budget Office:

                                                    April 18, 2008.
Hon. Henry A. Waxman,
Chairman, Committee on Oversight and Government Reform,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: As you requested, the Congressional 
Budget Office has prepared the enclosed cost estimate for H.R. 
5712, the Close the Contractor Fraud Loophole Act.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Matthew 
Pickford.
            Sincerely,
                                                   Peter R. Orszag.
    Enclosure.

H.R. 5712--Close the Contractor Fraud Loophole Act

    H.R. 5712 would amend the Federal Acquisition Regulation 
primarily to require certain contractors working outside of the 
United States to notify the government of any criminal 
violations of U.S. laws or any contract overpayments that occur 
while performing such contracts. According to the Office of 
Management and Budget and the General Services Administration, 
the Administration is in the process of implementing similar 
requirements. Thus, CBO estimates that implementing H.R. 5712 
would have no significant impact on agencies' spending.
    Enacting the legislation could increase revenues from civil 
and criminal fines that could be imposed on those who violate 
the amended regulations. Collections of civil fines are 
recorded in the budget as receipts (that is, revenues) and 
deposited into the general fund of the Treasury. Criminal fines 
are also recorded as receipts, which are deposited in the Crime 
Victims Fund and spent in subsequent years. CBO expects that 
any additional revenues or direct spending associated with 
civil and criminal fines would total less than $500,000 each 
year.
    The bill contains no intergovernmental or private-sector 
mandates as defined in the UMRA and would not affect the 
budgets of state, local, or tribal governments.
    The CBO staff contact for this estimate is Matthew 
Pickford. The estimate was approved by Peter H. Fontaine, 
Assistant Director for Budget Analysis Division.

         CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    No changes to existing law are made by H.R. 5712, as 
reported.

                            ADDITIONAL VIEWS

    I had serious concerns about H.R. 5712 as originally 
introduced. The bill would have provided that a knowing failure 
to report violations of criminal law and overpayments related 
to a federal contract can be a cause for debarment or 
suspension for all firms, including those holding contracts 
performed overseas and contracts for commercial items. It was 
an attempt to ``strengthen'' an ethics compliance program 
currently under development by the Administration.
    In actuality, the bill as introduced did not make as 
significant a change as intended to the substance of the 
proposed revisions to the acquisition regulations. Even without 
H.R. 5712, the proposed regulations would have applied the 
enforcement of debarment and suspension for failure to report 
to all firms, including those holding contracts performed 
overseas and contracts for commercial items. The problem was 
the bill leapfrogged the statutorily-designated process for 
writing acquisition regulations and would have encased in 
statute a new reporting scheme yet to be thoroughly vetted.
    The concept of mandatory reporting by contractors of 
possible criminal violations based on ``reasonable grounds'' is 
unprecedented and controversial. The rule was the subject of 
more the 70 comments. As expected, many of the firms subject to 
the rule expressed serious and legitimate concerns about the 
concept and the wording of the proposal.
    During the one hearing held by the Subcommittee on 
Government Management, Organization and Procurement, none of 
the agencies providing testimony, including the Department of 
Justice, nor the contractor community, supported H.R. 5712 as 
introduced. Instead, the stakeholders suggested the well-
established regulatory drafting process should be allowed to 
continue to completion. They favored this approach because it 
would allow all interested parties the opportunity to submit 
comments and have those comments considered in the deliberative 
process.
    The amendment adopted by the Committee ensures the Federal 
Acquisition Regulation is revised to include a requirement that 
federal contractors notify the government of violations of 
federal criminal law or overpayments in connection with the 
award or performance of contracts or subcontracts--and it will 
ensure the regulation is applicable to all contracts, including 
those performed overseas and those for commercial items. The 
key is the amendment does not mirror the proposed regulation's 
preliminary language but will leave the precise wording to the 
regulation writers. The stated purposes of H.R. 5712 ultimately 
will be accomplished--but accomplished through the more 
appropriate acquisition rulemaking process.
    These changes make H.R. 5712 a better bill, but not a bill 
I believe should be pursued. All interested parties would be 
better served if the Committee had spent its time attempting to 
improve the operation of the federal acquisition system--in 
order to better acquire the best value goods and services the 
government so desperately needs. Furthermore, the Committee 
should have allowed the regulatory process to go forward 
without any interference at all. Nonetheless, under the 
circumstances, I accept this bill as an adequate solution.

                                  

```