Gratuities – Cautionary Tales for Contractors and Government Employees – Fred Geldon

Recent events demonstrate that government investigators and prosecutors are taking more seriously the ethical regulations that govern gratuities.  Cases in point:

  • On April 25, 2013, the U.S. Department of Justice issued a press release announcing that a Bureau of Prisons (BOP) employee had pled guilty to a charge of receiving unlawful gratuities.  The BOP employee, a supervisory traffic management specialist in the BOP Relocation Services section, was responsible for giving relocating BOP employees a list of approved movers and then referring their move to agents of the chosen carrier.  While performing these duties the employee received spa and salon gift cards in the amount of $1,007 and $790 from one carrier’s agent, as well as free moving services from moving companies.  The BOP employee was subsequently assessed a fine of $1,500 and placed on probation for 18 months.
  • On June 5, 2013, the Washington Post reported that the Internal Revenue Service (IRS) had placed two managers on administrative leave for accepting free food and other gifts in violation of government ethics rules.  These violations were discovered during an audit of a years-old conference, at which the managers “allegedly held an after-hours party in their private hotel suites.”  It apparently was not clear who gave the managers the food, worth $1,162.  Acting Commissioner Danny Werfel said in a statement to the Post that the IRS has started the process of firing the managers.

The basic rules applicable to government employees regarding gratuities are set forth in the Standards of Ethical Conduct for Employees of the Executive Branch (“Standards”), which are codified at 5 C.F.R. § 2635.  The Standards generally prohibit federal government employees from accepting gifts[1] from “prohibited sources,” a category that includes, among others, contractors (and employees of contractors) doing business with or seeking to do business with the federal government employee’s agency.  5 C.F.R. §§ 2635.102(k), 2635.203(d).

There are some exceptions, however.  For example, under the Standards, federal employees may accept, even from “prohibited sources,” items worth $20 or less, as long as the total value of the gifts from the same source is not more than $50 in a single calendar year (calculated by including a contractor and its employees as a single source).  5 C.F.R. § 2635.204(a).  The Standards also include other limited exceptions, such as gifts motivated by family relationships.

The size of the gratuities in the two recent examples discussed above far exceeds these thresholds.  In the case prosecuted by the Justice Department, however, the amount at issue was significantly less than amounts usually cited in large corruption cases, and demonstrates that even these (relatively) small violations are attracting the attention of auditors, investigators, and prosecutors.

Although the Standards apply only to government employees who receive gratuities rather than to contractor employees who offer gratuities, contractors can face potential liability in relation to gratuities as well.

The federal criminal gratuities statute, 18 U.S.C. § 201, provides for fines or imprisonment for anyone who, for example,

directly or indirectly gives, offers, or promises anything of value to any public official, former public official, or person selected to be a public official, for or because of any official act performed or to be performed by such public official, former public official or person selected to be a public official.

18 U.S.C. § 201(c)(1)(A).

Unlike a bribe, an illegal gratuity does not require an intent to influence; rather, the illegal gratuity only need be given “for or because of” an official act.  An illegal gratuity “may constitute merely a reward for some future act that the public official will take (and may already have determined to take), or for a past act that he has already taken.”  United States v. Sun-Diamond Growers of California, 526 U.S. 398, 404-405 (1999).  There must, however, be a connection, i.e., the government must prove “a link between a thing of value conferred upon a public official and a specific ‘official act’ for or because of which it was given.”[2]  Id. at 414.

The risk to contractors is heightened, however, because the line between an acceptable gift and an illegal gratuity is nuanced.    For example, in  United States v. Hoffmann, 556 F.3d 871, 877 (8th Cir. 2009), the court rejected the defendant’s contention that the Government had failed to prove that he violated the gratuities statute because he did not reasonably believe that the government employee would take an official action and because the government employee never did so.  Rather, the court upheld the conviction finding that a “reasonable juror could conclude” that the contractor gave the government project manager a set of golf clubs “to . . . reward future performance.”

The risk to contractors is demonstrated by yet another recent Justice Department announcement in a whistleblower “qui tam” case that included gratuities allegations.  On March 7, 2013, DOJ announced that three CIA contractors (American Systems Corporation, Anixter International Inc., and Corning Cable Systems LLC) had agreed to pay $3 million to settle allegations they violated the False Claims Act and Anti-Kickback Act.  The announcement included allegations[3]  that in pursuit of a 2009 contract the companies had provided gratuities (meals, entertainment, gifts, and tickets to sporting and other events) to CIA employees.

Prohibitions on gratuities applicable to contractors are also incorporated into various FAR provisions.  For example, FAR 52.203-13(b)(3) (Contractor Code of Business Ethics and Conduct) requires that contractors “timely disclose, in writing, to the agency Office of the Inspector General, with a copy to the Contracting Officer, whenever, in connection with the award, performance, or closeout of this contract or any subcontract thereunder, the Contractor has credible evidence that a principal, employee, agent, or subcontractor of the Contractor has committed . . . [a] violation of Federal criminal law involving . . . gratuity violations found in Title 18 U.S.C.”  In addition, FAR 52.203-3(a) allows the government to terminate a contract if a contractor or contractor employee “[o]ffered or gave a gratuity (e.g., an entertainment or gift) to an officer, official, or employee of the Government; and [i]ntended, by the gratuity, to obtain a contract or favorable treatment under a contract.”  The government also may recover damages and/or suspend or debar a contractor from federal contracting for violations of this clause.  See FAR 3.204(c).

Finally, in addition to potential criminal penalties and suspension and debarment, providing gratuities to government employees can also result in other adverse effects for a contractor, such as negative past performance ratings that could affect current and future business.

In sum, to maintain healthy relationships with their government customers and to protect government employees and themselves from potential liability, contractors should understand the laws and regulations applicable to gratuities to government employees, have a clear policy regarding gratuities (which, for many contractors includes a prohibition on giving gratuities) and provide appropriate education and training to their employees.

Of course, contractors should also be aware of laws and prohibitions that apply in related contexts, including anti-kickback laws that prohibit certain improper payments between prime contractors and subcontractors, the Foreign Corrupt Practices Act, which prohibits certain types of payments to foreign officials, and laws and regulations that regulate payments that can be made to members of Congress and staff.



[1] “Gifts” include entertainment, favors, discounts, hospitality, transportation, and other things of value.  5 C.F.R. § 2635.203(b).

 

[2] The Court in Sun-Diamond also rejected the Government’s contention that the illegal gratuities statute is violated by providing a gift to an official because he is in a position (i) to act favorably at some unknown future time, or (ii) to “build a reservoir of goodwill that might ultimately affect one or more of a multitude of unspecified acts.” Sun-Diamond, at 405.

[3] The Justice Department also alleged that the companies improperly received source selection information from a CIA employee to whom they had provided gratuities.

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