Ethical Pitfalls for Government Contractors
by Eileen Youens
A salesman treats a potential new client to an expensive steak dinner. A business owner helps her son’s new software company get started by ordering the company’s electronic records management package for her business. While both of these scenarios are perfectly acceptable in the private sector, they may constitute criminal behavior if the new client in the first example or the business owner in the second example is a public servant.
Many laws and rules regulate the relationships that governments have with their contractors and potential contractors. These laws and rules cover obvious crimes like bribery, improper influence and making false claims against government funds, but they also address behavior that may not seem improper to companies accustomed to doing business in the private sector: specifically, giving gifts to public servants and self-dealing. The following discussion will focus on these last two “ethical pitfalls,” concluding with guidance on where to find the relevant laws and rules.
Gifts to Public Servants
Simply giving a gift to a public servant who is involved in awarding government contracts—even without any suggestion of quid pro quo, and even before bidding on a contract—may be illegal under so-called “gifts and favors” laws. The scope and consequences of these laws vary tremendously. When reviewing gifts and favors statutes and regulations, a focus on the following seven factors is recommended: (1) which gift-givers are covered (e.g., potential future contractors, current contractors); (2) which types of gifts, favors or honorarium are prohibited (or, if permitted, require disclosure when given); (3) which public servants are covered; (4) which relatives (or employees or other affiliates) of those public servants are covered; (5) if disclosure is required, what are the requirements for disclosure; (6) if there are exceptions, what are the requirements for each exception; and (7) what the consequences are for violating the statute or rule.
For example, it is a Class A misdemeanor under Texas law for a person “who is interested in or likely to become interested in any contract or purchase” involving the exercise of a public servant’s discretion to “offer, confer, or agree to confer any benefit on” that public servant. Tex. Penal Code §§ 36.08, 36.09. (There are several exceptions. See Tex. Penal Code §§ 36.07, 36.10.)
As another example, subsection 36(b)(3) of the Grants Management Common Rule (a set of regulations that applies to all government recipients of federal grant funds) also contains broad restrictions on gifts to public servants. Although there are no criminal penalties imposed by the Rule, governments who violate the Rule risk losing grant funding.
Most governments place restrictions on contracts that benefit public employees or officials (and their family members) financially. When reviewing these self-dealing statutes and rules, look for the same seven factors outlined in the Gifts section above, modifying the first two as follows: (1) which types of personal interest (e.g., owning stock in a company seeking to do business with the government, receipt of income under the contemplated contract) are prohibited or require disclosure; and (2) which activities undertaken by the public servant (e.g. awarding contracts, drafting specifications) are prohibited or trigger disclosure.
One example of a self-dealing restriction can be found in Section 12A-1(a)(3) of the Dallas City Charter, which prohibits city officials or employees from having “any financial interest, direct or indirect,” or from engaging “in any business, transaction, or professional activity” or from incurring “any obligation of any nature” that is in conflict with the proper discharge of the official’s or employee’s duties. Compare this restriction with state law, which prohibits local government officials from voting on a contract that presents a conflict of interest (as defined) and requires disclosure of certain conflicts of interest (as defined). See Texas Local Government Chapters 171 and 176.
Where to Find Relevant Laws and Regulations
Several layers of laws and regulations—the United States Constitution, federal statues, federal regulations, state constitutions, state statutes, state regulations and local rules (such as charters and ordinances)—apply to public entities and their contractors. You need to familiarize yourself with the applicable provisions of each pertinent source of law, as well as any relevant case law and attorney general opinions, depending on where your clients want to do business. Many government entities offer handbooks or guidelines to potential contractors. (See, e.g., www.oag.state.tx.us/open/publications_og.shtml) Start there, but do your own research as well.
Eileen Youens teaches and advises local governments and government contractors on public procurement issues. She can be reached at email@example.com.