Reprinted from Roll Call (October
work for a company that makes sales to the government, and one of my roles is to
ensure compliance with government contracting laws. In some recent company
discussions about so-called pay-to-play laws, some of our business folks have
argued that the cost of strict compliance might outweigh the benefit. They say
the worst that can happen is being banned from future government contracts, and
that this is a risk they are willing to take because government contracts are
only a small part of our business. I know this is not a good compliance
approach. Can you help me explain to them why?
A: As you probably know,
pay-to-play laws are designed to prevent government contractors from making
gifts or other contributions to government officials in an attempt to curry
favor in the government contracting process. The “pay” is a gift or campaign
contribution and the “play” is the opportunity to do business with the
government. Ethics advocates argue that laws restricting pay-to-play schemes
help ensure that government contract proposals are judged on their merits, not
on officials’ personal interests.
What can make compliance with pay-to-play
laws especially difficult is that there are so many different laws at so many
different levels of government, many of which impose widely varying
restrictions. Federal, state and local jurisdictions often have their own sets
of rules. Moreover, even within the same jurisdiction, different agencies can
have different rules. Some laws are blanket prohibitions on campaign
contributions by government contractors. Others restrict gifts of meals and
entertainment to contracting officials. There are few, if any, jurisdictions
that have restrictions that are exactly the same.
Given the complexity of compliance, it is
not surprising you have some employees who would like to throw their hands in
the air and say “enough with it.” But you are right that doing so would be a bad
idea. It could put your company at much greater risk than just losing a few
sales contracts. Even violations that your employees might consider fairly minor
can lead to major penalties, far beyond merely being banned from doing business
with the government. There are some eye-popping recent examples.
Last month Goldman Sachs settled Securities
and Exchange Commission charges of violating rules intended to combat
pay-to-play practices by investment advisers. Those rules, adopted in 2010, are
aimed at preventing investment firms from obtaining business with the government
through campaign contributions. They include a two-year ban on receiving
investment business from a government agency following a campaign contribution
to agency officials.
According to the SEC charges, a Goldman
Sachs vice president in Boston violated the rules by doing work for the
gubernatorial campaign of then-Massachusetts Treasurer Tim Cahill while Goldman
Sachs participated at the same time in underwritings with Massachusetts issuers.
For the most part, the “contributions” that the VP made were not monetary but
rather “in-kind” — meaning he performed services for Cahill’s campaign such as
fundraising, drafting speeches and communicating with reporters.
The charges caught the attention of many
political lawyers because, as the SEC stated in its press release, they marked
the “first SEC enforcement action for pay-to-play violations involving ‘in-kind’
non-cash contributions to a political campaign.”
So, what were the penalties? As part of the
settlement, Goldman Sachs was temporarily banned from underwriting business for
Massachusetts. Goldman Sachs also agreed to pay more than $12 million in
disgorgement (the forced giving up of profits obtained by illegal or unethical
acts) and fines to the federal government, and an additional $4.6 million to
settle state law charges with the Massachusetts Attorney General’s Office. This
was despite the fact that, according to Goldman Sachs, when the firm detected
the VP’s activities it “promptly alerted regulators, terminated his employment
and fully cooperated with the investigations.”
In another recent case, a company’s series
of gifts to government officials ranging in value from a mere $8 to $72 resulted
in a fine exceeding $1.6 million. The fine was part of a settlement reached by
National Grid, an electricity and gas company, for gifts to officials of its New
York state regulator, the Public Service Commission. Over the course of nine
years, National Grid employees allegedly treated PSC officials to meals, golf
outings and other gifts, totaling $7,000 in value. Like Goldman Sachs, National
Grid stated that it reported the gifts to the government as soon as it became
aware of them.
These examples underscore the importance of
the very compliance efforts you are trying to stress to your employees. In
neither case did the government allege that the “pay” to government officials
was part of an overall corporate strategy to curry favor with the officials.
Rather, in both cases, the company facing sanctions stated that it reported the
improper gifts as soon as it discovered them. While this self-reporting may have
resulted in reduced penalties for the two companies, it did not protect them
from millions of dollars in fines.
So, compliance efforts are not just
important. They are the only way to prevent violations and protect companies
from liability for violations of pay-to-play laws. Employees need to be educated
about the rules and the associated risks.
While being a good corporate citizen after
discovering improper conduct might help, it is not enough to prevent companies
from serious penalties. If this doesn’t convince your employees of the
importance of compliance, maybe nothing will.
© Copyright 2012, Roll Call Inc. Reprinted with permission. Widely regarded as the leading publication for Congressional news and information, Roll Call has been the newspaper of Capitol Hill since 1955. For more information, visit www.rollcall.com.