Do you remember that episode of Friends where Monica got fired from her restaurant job for accepting free steaks from the restaurant’s supplier?  It was in the second season, and is described thusly—

Monica gets a new position as Head Lunch Chef, also in charge of purchasing, who has her own little desk (when Roland's not there), and a beeper. However, she is soon fired for accepting a gift from the restaurant's new meat supplier.

We all learned then (if we didn’t know it already) that accepting kickbacks from a supplier creates a conflict of interest and is a “no-no” in the procurement world.  Soliciting or accepting a kickback is more serious in the world of Federal government contracting, as we shall discuss in some depth.

The FAR discusses kickbacks from subcontractors at 3.502.  Here are the relevant definitions—

• “Kickback” means any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind which is provided, directly or indirectly, to any prime contractor, prime contractor employee, subcontractor, or subcontractor employee for the purpose of improperly obtaining or rewarding favorable treatment in connection with a prime contract or in connection with a subcontract relating to a prime contract.
• “Person” means a corporation, partnership, business association of any kind, trust, joint-stock company, or individual.
• “Prime contract” means a contract or contractual action entered into by the United States for the purpose of obtaining supplies, materials, equipment, or services of any kind.
• “Prime Contractor” means a person who has entered into a prime contract with the United States.
• “Prime Contractor employee” means any officer, partner, employee, or agent of a prime contractor.
• “Subcontract” means a contract or contractual action entered into by a prime contractor or subcontractor for the purpose of obtaining supplies, materials, equipment, or services of any kind under a prime contract.
• “Subcontractor” (1) means any person, other than the prime contractor, who offers to furnish or furnishes any supplies, materials, equipment, or services of any kind under a prime contract or a subcontract entered into in connection with such prime contract; and (2) includes any person who offers to furnish or furnishes general supplies to the prime contractor or a higher tier subcontractor.

For a bit of the relevant Federal Acquisition Regulation policy, here’s a bit from 3.502-2

The Anti-Kickback Act of 1986 (41 U.S.C. 51-58) was passed to deter subcontractors from making payments and contractors from accepting payments for the purpose of improperly obtaining or rewarding favorable treatment in connection with a prime contract or a subcontract relating to a prime contract.

The Act—

(a) Prohibits any person from—

(1) Providing, attempting to provide, or offering to provide any kickback;

(2) Soliciting, accepting, or attempting to accept any kickback; or

(3) Including, directly or indirectly, the amount of any kickback in the contract price charged by a subcontractor to a prime contractor or a higher tier subcontractor or in the contract price charged by a prime contractor to the United States.

(b) Imposes criminal penalties on any person who knowingly and willfully engages in the prohibited conduct addressed in paragraph (a) of this subsection.

(c) Provides for the recovery of civil penalties by the United States from any person who knowingly engages in such prohibited conduct and from any person whose employee, subcontractor, or subcontractor employee provides, accepts, or charges a kickback.

(d) Provides that—

(1) The contracting officer may offset the amount of a kickback against monies owed by the United States to the prime contractor under the prime contract to which such kickback relates;

(2) The contracting officer may direct a prime contractor to withhold from any sums owed to a subcontractor under a subcontract of the prime contract the amount of any kickback which was or may be offset against the prime contractor under paragraph (d)(1) of this subsection; and

(3) An offset under paragraph (d)(1) or a direction under paragraph (d)(2) of this subsection is a claim by the Government for the purposes of the Contract Disputes Act of 1978.

(e) Authorizes contracting officers to order that sums withheld under paragraph (d)(2) of this subsection be paid to the contracting agency, or if the sum has already been offset against the prime contractor, that it be retained by the prime contractor.

(f) Requires the prime contractor to notify the contracting officer when the withholding under paragraph (d)(2) of this subsection has been accomplished unless the amount withheld has been paid to the Government.

(g) Requires a prime contractor or subcontractor to report in writing to the inspector general of the contracting agency, the head of the contracting agency if the agency does not have an inspector general, or the Department of Justice any possible violation of the Act when the prime contractor or subcontractor has reasonable grounds to believe such violation may have occurred.

(h) Provides that, for the purpose of ascertaining whether there has been a violation of the Act with respect to any prime contract, the Government Accountability Office and the inspector general of the contracting agency, or a representative of such contracting agency designated by the head of the agency if the agency does not have an inspector general, shall have access to and may inspect the facilities and audit the books and records, including any electronic data or records, of any prime contractor or subcontractor under a prime contract awarded by such agency.

(i) Requires each contracting agency to include in each prime contract exceeding $100,000 for other than commercial items (see Part 12), a requirement that the prime contractor shall—

(1) Have in place and follow reasonable procedures designed to prevent and detect violations of the Act in its own operations and direct business relationships (e.g., company ethics rules prohibiting kickbacks by employees, agents, or subcontractors; education programs for new employees and subcontractors, explaining policies about kickbacks, related company procedures and the consequences of detection; procurement procedures to minimize the opportunity for kickbacks; audit procedures designed to detect kickbacks; periodic surveys of subcontractors to elicit information about kickbacks; procedures to report kickbacks to law enforcement officials; annual declarations by employees of gifts or gratuities received from subcontractors; annual employee declarations that they have violated no company ethics rules; personnel practices that document unethical or illegal behavior and make such information available to prospective employers); and

(2) Cooperate fully with any Federal agency investigating a possible violation of the Act.

(j) Notwithstanding paragraph (i) of this subsection, a prime contractor shall cooperate fully with any Federal government agency investigating a violation of Section 3 of the Anti-Kickback Act of 1986 (41 U.S.C. 51-58).

But we’re not done yet.  Contract clause 52.203-7 (“Anti-Kickback Procedures”) will be found in most every Federal contract valued in excess of the simplified acquisition threshold (except for commercial contracts).  It says pretty much what’s posted above, verbatim, and also requires that essentially all of the prohibitions and requirements must be flowed-down to subcontractors “in all subcontracts under this contract which exceed $100,000.”

So we can all agree that accepting kickbacks in return for a favorable evaluation and award of a subcontract is a bad thing.  Monica just got fired for accepting her kickbacks, but when a Federal contract is involved, criminal penalties may be imposed in addition to civil ones. 

It’s kind of a big deal—which is why we are so surprised at the number of government contractors—both big and small—who lack the kind of controls mandated by the contract clause.  What do we mean?  Notice (for example) the clause language, which is unusually focused for a discussion of required contractor internal controls: 

…procurement procedures to minimize the opportunity for kickbacks; audit procedures designed to detect kickbacks; periodic surveys of subcontractors to elicit information about kickbacks; procedures to report kickbacks to law enforcement officials; annual declarations by employees of gifts or gratuities received from subcontractors; annual employee declarations that they have violated no company ethics rules; personnel practices that document unethical or illegal behavior and make such information available to prospective employers)….

How many of those controls do you have in place?  Do you have a Government contract that includes the Anti-Kickback Procedures clause?  (Of course you do, but go look and confirm for yourself.)  See that clause?  If you don’t have the required procedures and controls, you are in breach of your contract.  You have termination and litigation exposure, and you didn’t even know it.  Tsk, tsk.  You should have hired Apogee Consulting, Inc. a long time ago.

What happens to a company when its employees are accused of accepting kickbacks and there are some Government contracts involved?  Glad you asked, because we have an example of that situation right here.

Today’s example is (once again) KBR, prime contractor under the multi-billion dollar LOGCAP III contract.  KBR has been accused of employing persons in its transportation department who accepted kickbacks from two freight forwarders (presumably in return for the award of subcontracts).  The DOJ press release states—

The United States is pursuing allegations that the two freight forwarders, Eagle Global Logistics (which has since merged with TNT Logistics and become CEVA) and Panalpina provided unlawful kickbacks in the form of meals, drinks, tickets to sports events and golf outings to KBR employees. The government will seek damages and penalties under the False Claims Act and common law, as well as penalties under the Anti-Kickback Act.  (Italics added.)

The suit against KBR was filed by two “whistle-blowers” (called “relators”) under the False Claims Act.  The U.S. Government has investigated the allegations, and has decided to “intervene” in the lawsuit with respect to some (but not all) of them.  When the U.S. Government intervenes, it essentially takes over the lawsuit and, if the government is successful in securing a conviction or settlement, the relators will receive a percentage of the recovery.  The case is United States of America ex rel. Vavra, et al. v. Kellogg Brown & Root, Inc., et al., C.A. No. 1:04-CV-00042 (E.D. Tex.).

In the world of Government contracting, acceptance of kickbacks from subcontractors and other vendors is a serious matter that can lead to litigation and large-dollar pay-outs.  Investing in the appropriate controls won’t prevent 100% of employee wrongdoing—but it will go a long way toward limiting your exposure if they occur.  Go ahead and do the cost-benefit analysis; you’ll see that implementing the controls—the ones that you already agreed to implement when you executed that Government contract—is a smart investment.