[Federal Register Volume 76, Number 180 (Friday, September 16, 2011)]
[Rules and Regulations]
[Pages 57671-57674]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-23782]


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DEPARTMENT OF DEFENSE

Defense Acquisition Regulations System

48 CFR Parts 203 and 252

[DFARS Case 2010-D026]
RIN 0750-AG98


Defense Federal Acquisition Regulation Supplement; Display of DoD 
Inspector General Fraud Hotline Posters

AGENCY: Defense Acquisition Regulations System, Department of Defense 
(DoD).

ACTION: Final rule.

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SUMMARY: DoD is issuing a final rule amending the Defense Federal 
Acquisition Regulation Supplement (DFARS) to require contractors to 
display the DoD fraud hotline poster in common work areas.

DATES: Effective Date: September 16, 2011.

FOR FURTHER INFORMATION CONTACT: Ms. Meredith Murphy, 703-602-1302.

SUPPLEMENTARY INFORMATION:

I. Background

    This final rule implements the recommendations of the DoD Inspector 
General (IG) by providing a DFARS clause to use in lieu of the FAR 
clause at 52.203-14, Display of Hotline Poster(s).
    Government Accountability Office (GAO) Report GAO-09-591, entitled 
``Defense Contracting Integrity: Opportunities Exist to Improve DoD's 
Oversight of Contractor Ethics Programs,'' recommended that the DoD IG 
determine the need for defense contractors to display the DoD IG's 
fraud hotline poster.
    The DoD IG determined that DoD contractors, including contractors 
that have an ethics and compliance program that includes a reporting 
mechanism such as a hotline poster, need to display DoD fraud hotline 
posters in a common work area within business segments performing work 
under the contract and at contract work sites.
    FAR 52.203-14(c) states that ``(i)f the Contractor has implemented 
a business ethics and conduct awareness program, including a reporting 
mechanism, such as a hotline poster, then the Contractor need not 
display any agency fraud hotline posters, other than any required DHS 
posters.'' The DoD IG determined that this exemption has the potential 
to make the DoD hotline program less effective by ultimately reducing 
contractor exposure to DoD IG fraud hotline posters and diminishing the 
means by which fraud, waste, and abuse can be reported under the 
protection of Federal whistleblower protection laws. According to the 
DoD IG, some contractors' posters may not be as effective as the DoD 
poster in advertising the hotline number, which is integral to the 
fraud program. The DoD IG is also revising the DoD IG fraud hotline 
poster to inform contractor employees of their Federal whistleblower 
protections.
    Therefore, the prescription for use of the new DFARS clause 
provides no exception to the use of the DoD hotline poster for 
contractors that have implemented a business ethics and conduct 
awareness program, even those that include a reporting mechanism such 
as a hotline poster.

II. Discussion and Analysis

    DoD published a proposed rule at 76 FR 13327 on March 11, 2011, to 
implement the DoD IG's policy. Nine respondents submitted 25 public 
comments on the proposed rule. The comments are summarized and 
discussed in the following paragraphs.

 A. Supportive Comments

    Comments: Four respondents supported the DFARS rule, stating that 
it would assist employees in reporting fraud, waste, and abuse and 
might promote qui tam suits. Two respondents recommended expanding the 
rule's applicability by (1) Lowering the

[[Page 57672]]

threshold or (2) making it applicable to U.S.-owned and -operated firms 
that perform overseas.
    Response: DoD acknowledges the respondents' support. DoD declines 
to expand the rule's applicability because the prescription and 
conditions for the use of the hotline poster in DoD contracts are 
exactly those prescribed at FAR 3.1004(b) for the inclusion of the FAR 
clause at 52.203-14, Display of Hotline Poster(s). The respondents did 
not provide rationale supporting the proposed further expansion of 
requirements to use the DoD IG hotline poster clause.

B. Requirement To Post the DHS Hotline Poster

    Comments: One respondent asked that the DFARS Procedures, Guidance 
and Information (PGI), include guidance on obtaining relevant 
information to be inserted in the clause regarding the title of the 
applicable Department of Homeland Security (DHS) fraud hotline poster 
and Web site(s) or other contact information. Another respondent, 
however, stated that the requirement, at 252.203-700X(b)(ii) of the 
proposed rule, to display the DHS fraud hotline posters, is unnecessary 
for several reasons. It is unlikely, according to the respondent, that 
DoD would be awarding DHS contracts for disaster recovery, and the 
coverage at FAR 52.203-14 relating to the display of DHS fraud hotline 
posters does not need to be duplicated in the DFARS.
    Response: There is a reason to include in the DFARS clause a 
requirement to use the DHS fraud hotline poster when DHS disaster 
relief funding is added to a DoD contract. The DoD clause prescription 
has been expanded (at 203.1004(b)(2)(ii)) to explain that information 
regarding the DHS hotline poster is needed only when DHS disaster 
relief funding is added to the DoD contract. In most cases, there is no 
need to display the DHS hotline poster and, therefore, no need to 
include in the clause information about where to obtain the DHS poster. 
Adding this clarification to the DFARS clause prescription removes any 
need to add PGI guidance on relevant information regarding the 
applicable DHS fraud hotline poster and Web sites or other contact 
information.

C. Rule Does Not Pass a Cost/Benefit Analysis

    Comments: Five comments were received on this issue. One respondent 
remarked that the new requirement will be unnecessarily burdensome with 
little, if any, commensurate benefit. The respondent called the rule 
``an example of the stacking of regulations within and across agencies 
that increases the burden without any apparent benefit to achieving the 
mission.'' Three other respondents made essentially the same point, one 
suggesting that the rule could be viewed as an unintentional but 
unfortunate effort by DoD to discourage contractors from implementing 
rigorous internal mechanisms for dealing with compliance concerns. A 
respondent suggested that the proposed rule ignored the significant 
change already made to the FAR that requires mandatory reporting to the 
agency IG if the contractor has credible evidence of a violation of 
Federal criminal law involving fraud, conflict of interest, bribery, or 
gratuity, or a violation of the civil False Claims Act in connection 
with Government contracts (see FAR 3.1003(b)).
    According to one respondent, many company employee hotline reports 
simply disclose a concern about an activity or behavior without the 
employee knowing whether it violates only company policy or some 
Government contract provision or law. Posting the DoD IG hotline poster 
will confuse employees, asserted the respondent, and will result in 
company employees not reporting potentially valuable information to 
anyone.
    Response: A requirement to hang a free poster in work areas does 
not appear to be measurably burdensome. Further, the DoD poster 
contains a prominent location for inclusion of the contractor's own 
fraud hotline number and does not preclude or preempt posting of a 
contractor's separate fraud hotline poster. As to any additional burden 
on the DoD IG, that office has weighed the potential cost and elected 
this approach.

 D. Replaces the Contractor as the First Line of Defense Against Waste 
and Fraud

    Comments: One respondent stated that this change would seriously 
undermine the role company hotline posters have in internal contractor 
compliance and ethics programs. The respondent noted that these company 
programs have a proven track record of inhibiting improper and/or 
illegal behavior. This respondent and one other respondent expressed 
concern that, from a purely practical perspective, removing the 
exemption and requiring the use of the DoD hotline posters will usurp 
the company's position as the first line of defense against waste and 
fraud and, instead, place the DoD/IG in that role.
    Response: There is no intent to replace the company hotline poster. 
This rule supplements the Government defense against fraud, waste, and 
abuse.

E. Will Result in Inefficiencies for Both Contractors and the DoD IG

    Comments: Five comments were received from two respondents. A 
respondent concluded that posting the DoD IG fraud hotline poster will 
result in the DoD IG becoming involved in matters of an urgent nature, 
as well as a significant number of day-to-day issues. Both respondents 
pointed out that the majority of the matters reported to company 
hotlines are human resource-related issues that have little or nothing 
to do with the direct performance and final deliverables under DoD-
funded contracts and subcontracts. The respondents were concerned that, 
if such matters are reported through the DoD IG fraud hotline rather 
than directly to the contractor, the latter will be left to learn about 
them from the DoD IG and will be unable to respond quickly, which 
ultimately will have a negative impact on employee morale. Further, 
display of the DoD IG fraud hotline posters, according to a respondent, 
will assuredly result in the DoD IG being quickly drawn into a myriad 
of personnel and related issues, thus bogging down the system. The 
respondents considered that result to be against the best interests of 
both DoD and its contractors.
    The respondents also noted that, if employees choose to contact the 
DoD IG hotline regarding more serious potential workplace-safety or 
product-quality matters, the contractor may not learn about these 
matters in a timely manner, thereby increasing the possibility of 
injury or deficient product quality. The respondents suggested that 
directly inserting the DoD IG into these matters could potentially 
result in DoD ``taking on some measure of responsibility for failing to 
respond in a timely manner.'' One of the respondents quoted the GAO 
report as recognizing these potential issues:

    ``* * * there might be practical reasons for continuing to 
exempt some defense contractors with their own hotlines from 
displaying DOD's hotline poster, such as avoiding the confusion or 
duplication that could occur with too many hotline posters on 
display in one place * * *''

    Response: This rule provides contractor employees with more than 
one option for reporting matters of concern. Further, the Office of the 
DoD IG advises that its fraud hotline is adequately staffed with 
personnel trained to recognize and react appropriately to reports with 
the potential to affect safety or quality. They

[[Page 57673]]

further advise that the staff is trained to distinguish between routine 
personnel issues and those that impact Government contracts.

F. Unnecessary Because of Contractors' Existing Duty

    Comments: Four respondents raised issues on this subject. One 
respondent pointed out that contractors already have existing 
contractual and regulatory duties to notify the Government of certain 
significant events that occur in connection with contract performance. 
Another respondent stated that the requirement is likely to lead to 
confusion as to appropriate reporting channels and mechanisms. The 
respondents asserted that defense industry and research institutions, 
as well as other segments of DoD's contracting community, take most 
seriously the responsibility to self-report or voluntarily disclose 
violations to the Government. Contractors also take very seriously the 
need to have open and accessible reporting mechanisms and respond 
expeditiously and thoroughly to matters raised through those reporting 
mechanisms. Creating an alternate reporting mechanism without the same 
level of accountability as the contractor's in-house or external 
reporting mechanism, according to respondents, adds no value to the 
process and undermines existing systems, processes, and programs 
already in place. A respondent took issue with the DoD IG implication, 
made in the background section of the proposed rule (76 FR 13328, March 
11, 2011), that reports made to a contractor hotline diminished the 
protections available under Federal whistleblower-protection laws. This 
respondent expressed the strong belief that adequate provisions ensure 
that employees who in good faith report information to a company 
hotline, but who are not themselves culpable, have full whistleblower 
protection for their disclosures.
    Response: For those contractors that have existing internal 
compliance programs with a fraud hotline number, the posting of the DoD 
IG fraud hotline poster supplements the existing reporting mechanisms. 
A contractor's existing duty to self-report or voluntarily disclose 
violations to the Government is not preempted by posting the DoD IG 
fraud hotline poster.

 G. Exclusions and Flowdown Requirement

    Comments: One respondent expressed strong support for the $5 
million threshold and the exclusions provided for prime contracts that 
are for commercial items or that will be performed entirely outside the 
U.S. This respondent also strongly supported the $5 million threshold 
for flowdown of the requirement to subcontracts, as well as the 
exclusion from the flowdown requirement for subcontracts that are for 
commercial items or that will be performed entirely outside the U.S. 
However, the respondent recommended that the flowdown requirement be 
further limited to first-tier subcontracts.
    Response: DoD has adopted the same criteria for flowdown of the new 
clause at DFARS 252.203-7004, Display of Fraud Hotline Posters, as is 
used for the comparable clause at FAR 52.203-14, Display of Hotline 
Posters. Because DoD is using DFARS 252.203-7004 in lieu of the clause 
at FAR 52.203-14, DoD has retained the same criteria for flowdown to 
subcontractors.

 H. Allow Electronic, as an Alternate to Physical, Display of Poster

    Comment: A respondent noted that the nature of the workplace has 
changed significantly, making the requirement to display the DoD IG 
hotline poster in traditional office locations less effective than it 
might have been in the past. The respondent, noting that the clause at 
FAR 52.203-14 already requires each company to display the hotline 
poster on the company's Web site, if a Web site is maintained, 
recommended that the DFARS final rule allow electronic posting to 
satisfy the regulatory requirement to ``display the hotline poster in 
common work areas.''
    Response: The DFARS coverage specifically requires electronic 
display, if the contractor maintains a Web site, in addition to 
physical display. These are the same posting rules as are used in the 
comparable FAR clause, 52.203-14, Display of Fraud Hotline Posters.

III. Executive Orders 12866 and 13563

    Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess 
all costs and benefits of available regulatory alternatives and, if 
regulation is necessary, to select regulatory approaches that maximize 
net benefits (including potential economic, environmental, public 
health and safety effects, distributive impacts, and equity). E.O. 
13563 emphasizes the importance of quantifying both costs and benefits, 
of reducing costs, of harmonizing rules, and of promoting flexibility. 
This is not a significant regulatory action and, therefore, was not 
subject to review under section 6(b) of E.O. 12866, Regulatory Planning 
and Review, dated September 30, 1993. This rule is not a major rule 
under 5 U.S.C. 804.

IV. Regulatory Flexibility Act

    DoD does not expect this final rule to have a significant economic 
impact on a substantial number of small entities within the meaning of 
the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because the 
requirement to display posters has minimal economic impact and the rule 
only applies to contracts and subcontracts that exceed $5 million in 
value, so few small business concerns are impacted. However, a final 
regulatory flexibility analysis has been performed and is summarized as 
follows:
    This rule was initiated in response to a Government Accountability 
Office (GAO-09-591) recommendation that the DoD IG should determine the 
need for defense contractors to display the DoD IG's fraud hotline 
poster. The DoD IG subsequently determined that DoD contractors, 
including contractors with an ethics and compliance program that 
includes a reporting mechanism such as a hotline poster (currently 
exempt), need to display DoD fraud hotline posters in a common work 
area within business segments performing work under the contract and at 
contract work sites.
    The final rule does not include an exemption for DoD contractors to 
post their own company posters instead of the DoD IG hotline poster and 
requires all DoD contractors with contracts that exceed $5 million to 
post the DoD IG fraud hotline poster. The DoD IG determined that this 
FAR exemption to the posting of an agency's fraud hotline poster had 
the potential to make the DoD IG hotline program less effective by 
ultimately reducing contractor exposure to DoD IG fraud hotline posters 
and diminishing the means by which fraud, waste, and abuse can be 
reported under the protection of Federal whistleblower protection laws. 
The DOD IG further determined that some contractors' posters may not be 
as effective as the DoD poster in advertising the hotline number, which 
is integral to the DoD fraud program. The legal basis for the rule is 
41 U.S.C. 1303 and 48 CFR chapter 1.
    The rule applies to all contractors with DoD contracts with a value 
that exceeds $5 million. Many small businesses, therefore, are not 
impacted.
    Paragraph (c) of the clause at FAR 52.203-14 provides that a 
contractor need not display any agency fraud hotline posters (other 
than required DHS posters) if the contractor has implemented a business 
ethics and conduct awareness program that includes a reporting 
mechanism such as a hotline poster. The DFARS rule differs

[[Page 57674]]

only in that it removes this FAR exemption.
    There is no reporting or recordkeeping requirement established by 
this rule. The rule does not duplicate, overlap, or conflict with any 
other Federal rules. There are no alternatives that would achieve the 
objectives of the final rule. No comments were received on the small 
business impact in response to the initial regulatory flexibility 
analysis.
    Interested parties may obtain a copy of the final regulatory 
flexibility analysis (FRFA) from the point of contact named herein. A 
copy of the FRFA has been submitted to the Chief Counsel for Advocacy 
of the Small Business Administration.

V. Paperwork Reduction Act

    The rule does not contain any information collection requirements 
that require the approval of the Office of Management and Budget under 
the Paperwork Reduction Act (44 U.S.C. chapter 35).

List of Subjects in 48 CFR Parts 203 and 252

    Government procurement.

Ynette R. Shelkin,
Editor, Defense Acquisition Regulations System.

    Therefore, 48 CFR parts 203 and 252 are amended as follows:

0
1. The authority citation for 48 CFR parts 203 and 252 continues to 
read as follows:

    Authority: 41 U.S.C. 1303 and 48 CFR chapter 1.

PART 203--IMPROPER BUSINESS PRACTICES AND PERSONAL CONFLICTS OF 
INTEREST

0
2. Amend section 203.1004 by revising paragraph (b)(2)(ii) to read as 
follows:


203.1004  Contract clauses.

    (a) * * *
    (b)(2)(ii) Unless the contract is for the acquisition of a 
commercial item or will be performed entirely outside the United 
States, if the contract exceeds $5 million, use the clause at 252.203-
7004, Display of Fraud Hotline Poster(s), in lieu of the clause at FAR 
52.203-14, Display of Hotline Poster(s). If the Department of Homeland 
Security (DHS) provides disaster relief funds for the contract, DHS 
will provide information on how to obtain and display the DHS fraud 
hotline poster.

PART 252--SOLICITATION PROVISIONS AND CONTRACT CLAUSES

0
3. Add section 252.203-7004 to read as follows:


252.203-7004  Display of fraud hotline poster(s).

    As prescribed in 203.1004(b)(2)(ii), use the following clause:

Display of Fraud Hotline Poster(s) (Sep 2011)

    (a) Definition. United States, as used in this clause, means the 
50 States, the District of Columbia, and outlying areas.
    (b) Display of fraud hotline poster(s).
    (1) The Contractor shall display prominently in common work 
areas within business segments performing work in the United States 
under Department of Defense (DoD) contracts DoD fraud hotline 
posters prepared by the DoD Office of the Inspector General. DoD 
fraud hotline posters may be obtained from the DoD Inspector 
General, Attn: Defense Hotline, 400 Army Navy Drive, Washington, DC 
22202-2884.
    (2) If the contract is funded, in whole or in part, by 
Department of Homeland Security (DHS) disaster relief funds, the DHS 
fraud hotline poster shall be displayed in addition to the DoD fraud 
hotline poster. If a display of a DHS fraud hotline poster is 
required, the Contractor may obtain such poster from:

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[Contracting Officer shall insert the appropriate DHS contact 
information or website.]

    (3) Additionally, if the Contractor maintains a company website 
as a method of providing information to employees, the Contractor 
shall display an electronic version of the poster(s) at the website.
    (c) Subcontracts. The Contractor shall include the substance of 
this clause, including this paragraph (c), in all subcontracts that 
exceed $5 million except when the subcontract--
    (1) Is for the acquisition of a commercial item; or
    (2) Is performed entirely outside the United States.


(End of clause)

[FR Doc. 2011-23782 Filed 9-15-11; 8:45 am]
BILLING CODE 5001-08-P