Misconduct unrelated to federal contracts could lead to suspension or debarment.

If companies are subject to debarment on a "general basis" for all perceived misconduct in all areas of activities--government or non-government--the question arises: What limits, if any, are there on the government's interpretation of a cause for suspension or debarment?

Front-page stories on Enron, Arthur Andersen and WorldCom should make evident that failure to fully integrate corporate compliance throughout the company could prove fatal to government business.

The federal government is required to award contracts only to responsible contractors. Corporate misconduct brought to an agency's attention may trigger review by a suspension and debarment official to determine whether a lack of business integrity or an inability to satisfactorily perform government contracts exists. Any agency may initiate suspension and debarment proceedings against contractors. The General Services Administration maintains the centralized "excluded parties listing system."

The intended purpose of suspension and debarment proceedings is to consider a company's "present responsibility" to do business with the government, and, theoretically, not to punish a contractor. As a result, the suspension and debarment official traditionally limited examinations to a company's record as a government contractor. Suspension or debarment based on unrelated conduct was rare because there appeared to be less of a logical connection to suspending or debarring a company from federal work where a contractor performed well, but ran afoul of legal problems in other, unrelated areas.

With the collapse of Enron and the involvement of Arthur Andersen, its outside auditor, the Office of Management and Budget asked GSA to initiate suspension and debarment proceedings, although no government contracting impact could be cited. GSA suspended Enron and debarred Arthur Andersen. Enron had not been a major government contractor, but Arthur Andersen had a well-established government contracts division with a sterling record as a contractor. Nonetheless, GSA debarred Arthur Andersen based on conviction of offences unrelated to any government contracts. This was one of many legal blows leading to the dissolution of Andersen.

More recently, GSA initiated proceedings to debar WorldCom Inc., which was accused of corporate fraud not directly related to the performance of government contracts. The company's government contracting divisions or personnel were not implicated, and the company had not been indicted by the government. However, GSA took action based on, inter alia, information provided by GSA's Office of Inspection General and the "Thornburgh Report" that had been prepared for the WorldCom board of directors.

The integrity of government contracting was not at risk in either the Enron, the Arthur Andersen suspension and debarments nor with respect to WorldCom. As a policy matter, while the government is always obligated to protect the integrity of contracting, the suspension and debarment official role in purely commercial or securities matters has been less clear. At a minimum, the ability of any contracting agency to analyze complex auditing issues or Sarbanes-Oxley requirements might be less extensive than that of the Securities and Exchange Commission, particularly where no government contract is involved.

The breadth of those grounds appropriate for findings of non-responsibility has been fought on the regulatory front as well. In late 2000, the Clinton administration released a set of contractor responsibility, or so-called "blacklisting" rules, which went well beyond government contracting performance requirements. These rules empowered contracting officers to deem a contractor non-responsible based on environmental, labor or other "unsatisfactory business practices," without providing the contracting officer resources to analyze these areas. Also, there was no connection established between the proposed responsibility criteria and a company's present responsibility or lack thereof to perform government contracts. These rules were withdrawn in 2002.

Even though we no longer have the "blacklisting rules," and suspension and debarment actions most often arise from primarily government contracting activities, it would be incorrect to assume that federal agencies, particularly GSA and the Defense Department, always will ignore serious corporate compliance issue in areas unrelated to government contracting. Increasingly, the trend has been for suspension and debarment officials to scrutinize any dishonest or serious corner-cutting dealings with shareholders or in commercial transactions--the assumption being the company might shortchange the government as well.

Similarly, Congress remains interested in contractor accountability and corporate "good citizenship" across-the-board. There are developments in corporate governance legislation and criminal law that will continue to affect all contractors. The Sarbanes-Oxley Act and the Organizational Sentencing Guidelines set standards far broader than the basic Federal Acquisition Regulations. Corporate compliance directors for government contractors, therefore, are well advised to ensure that their training and reporting programs broadly focus on good corporate citizenship, whether or not arising from government contracting. Moreover, as noted in NDIA's benchmark Statement of Defense Industry Ethics (National Defense, Nov. 2004), this is further evidence that there is a compelling case made for ensuring that the chief executive officer is also the chief ethics officer.

Dorn McGrath is a senior shareholder with the Greenberg Traurig law firm. Retired Army Brig. Gen. D. Michael Kelleher, who has served as a corporate ombudsman in a high-profile suspension and debarment matter, contributed to this article.