The last decade has constituted something of a “perfect storm” in public contracting and corporate oversight: decreasing public contract dollars, dramatic increases in contracting fraud at the federal, state, and municipal levels; declining public resources available for audit, investigation, oversight, and prosecution; and a rapidly diminishing public tolerance for the waste of limited taxpayer dollars and for “big government.” Calls for tougher sanctions against corporate fraud from the media, politicians, and the public are met with countervailing criticism that many law enforcement, regulatory, and prosecutorial agencies are perpetuating an “anti-business” environment that is not in the best interest of job creation and stimulating an economy. Consequently, every decision about how to handle a problem contractor has become a balancing act of protecting the public from harm; respecting the rights of participants in a free market economy; trying not to drive good companies out of business; and sending a message that fraud or regulatory violations will not be tolerated. With the recent federal spending on infrastructure and other U.S. based industry improvement investments in technology, there will be increased scrutiny on government contractors.
In the past, enforcement options granted to most agencies to achieve these goals had been limited and basic: they could either prosecute an individual or a company seeking a conviction, fines, and/or penalties, or decline prosecution in lieu of agency suspension or debarment action. At the federal level, under the Federal Acquisition Regulations, the enforcement approach is designed to protect the public by ensuring a contractor’s “present responsibility.” Contractors facing the scrutiny of government customers or regulators are confronted with a daunting choice. Acknowledging deficiencies in their company can lead to the imposition of sanctions that can affect their ability to continue to compete for public contracts, and/or their favorable status with a regulatory agency, either of which can further impact their ability to continue at all. These opposing forces have in many ways forced costly, lengthy and divisive litigation between government agencies, the Department of Justice, government contractors, and other corporations, often clogging up the justice system but doing little to help reduce fraud or improve the overall accountability and performance of public contractors or regulated industries.
With greater frequency, government regulators and federal and state prosecutors are utilizing effective alternatives to prosecutions under certain circumstances. They are increasingly using deferred prosecution agreements (DPAs) or non-prosecution agreements (NPAs), as well as civil settlement agreements, which can include some form of independent oversight to improve the contractor’s or corporation’s compliance programs, internal controls, performance and transparency. Independent monitoring offers an oversight approach that is also being used with even greater frequency in a variety of administrative settings across the country as a remedial, less severe alternative to other forms of government action.[2] For example, independent monitoring has been used as an alternative to resolve proposed suspension or debarment from government contracting; in lieu of license suspension or revocation for regulated professionals such as doctors, dentists, chiropractors or pharmacists; to evaluate adherence to antitrust Orders or to oversee the fulfillment of conditions established for the government’s approval in certain mergers and acquisitions; to provide oversight through corporate integrity agreements in false claims, consumer protection and other types of matters as well as to maintain efficacy by monitoring public utility projects and/or companies and their use of taxpayer dollars, or in place of loss of network provider status, including closure, of much-needed hospitals nursing homes, or other facilities. The inclusion of this remedial alternative in agreements as part of a comprehensive resolution can lead to quicker and more beneficial solutions for all sides. Using the independent monitoring approach fulfills the government’s responsibility to protect the taxpayer and consumers; ensure corporate responsibility; and support the regulatory agencies’ mission of protecting public health, safety, and welfare. At the same time, this option allows businesses and professionals to continue to operate, implement improvements where deficiencies are noted, and demonstrate, through the eyes of a professional independent monitor, that they have indeed fixed the problem that resulted in the underlying government concerns and scrutiny.
Independent Monitoring: Not a New Concept
Although applied more often today, independent monitoring is not a new concept. It has roots in the monitoring programs created in the late 1960s to help rehabilitate juveniles and first offenders. Pilot programs in Washington, DC and New York City provided offenders with counseling, training, and job placement in lieu of prosecution, in the hope that such programs would reduce recidivism.[3] Corporate monitoring was further inspired by the federal Inspector General Act of 1978 (the “1978 Act”), which created an inspector general to prevent and detect fraud, waste, and abuse for each of 12 major federal civilian agencies. The 1978 Act has been amended several times since its enactment. With the 2008 amendments, the 12 federal civilian agencies increased to 73 federal agencies.[4] As of February 2023, 74 statutory inspector generals operated in the federal government (64 governed by the 1978 Act).[5] Effective independent monitoring involves incorporation of oversight through auditing and investigative tools of a business or practice by a third party.[6] One prominent model has been used for more than 25 years in public school building projects in New York.[7] Perhaps the most successful pioneering program for corporate monitoring is the Independent Private Sector Inspector General (IPSIG) program developed in New York in response to the 1989 report, Corruption and Racketeering in the New York City Construction Industry.[8] In 1991, the Federal Sentencing Guidelines shifted policing responsibilities from the government to the defendant corporation, which had the effect of promoting independent monitoring and IPSIG models by offering less stringent penalties for companies that took steps to detect and prevent fraud, report misconduct promptly, and create a culture in which high-level officials did not participate in or condone criminal activity.[9] The Integrity Monitoring program, also known as the IPSIG program, established “a method to permit the City to enter into or continue contracts with companies that might otherwise be precluded from doing business with the City due to integrity issues. Under the Integrity Monitor program, these companies may be awarded City contracts if they agree to be monitored by an outside, independent monitor that reports to DOI [Department of Investigation], and to take other steps to ensure they have the requisite business integrity. For example, companies may be required to adopt and implement a Code of Ethics, an ethics training program for employees, and to submit periodic certifications to DOI concerning the business responsibility of the company and its subcontractors. The Integrity monitors are an individual or entity with legal, auditing, investigative, and other skills, designated by the City to help the City monitor the activity of specified City vendors as well as help the vendors reform their business practices so they can be considered for City contracts in the future, or continue with a contract in progress…DOI [also] engages in proactive monitorships for vendors working on City projects to prevent or reduce fraud, waste and abuse – particularly on large scale construction projects. For example, the New York City Department of Environmental Protection’s Rapid Repairs Program (“RRP”) was an emergency initiative implemented after Hurricane Sandy on October 29, 2012, which caused substantial damage citywide. RRP provided basic needs to NYC residents affected by the storm including heat, hot water, and electricity. DOI implemented a monitoring program for RRP to oversee repairs by contractors at over 13,000 residential units.”[10] This monitoring performed by IPSIGs reportedly “resulted in a cost savings of approximately $30 million in potential waste and mismanagement.”[11] The independent monitoring model that has evolved in federal contracting, as well as with licensed and regulated industries around the country, differs substantially from the IPSIG model, which has been previously criticized by some who feel that IPSIGs can be too intrusive into areas of a company that have nothing to do with the matter at hand.
The increased focus on corporate scrutiny resulting from the 2001 Enron scandal, and in more recent years the growing focus on financial services, corruption, environmental, antitrust and consumer protection, have increased public attention to the challenges of addressing corporate business ethics in our country. Strengthening of the Civil False Claims Act legislation federally and in many states, and the increased use of DPAs, Civil Settlement Agreements, Final Judgments and Consent Decrees, have furthered the impetus to use corporate monitors to help address the costs of litigation and protect the public.
In the past, “a prosecutor’s choices when faced with corporate wrongdoing, were essentially binary: [they] could either bring charges or decline prosecution, with no middle ground allowing for continued supervision or enforced remediation.”[12] Because of the rigidity of then-existing standards, prosecutors sought “a way that would enable them to exercise their discretion not to charge a corporation in appropriate circumstances but that would, at the same time, give them sufficient leverage to require significant changes in corporate culture, compliance and controls and, as importantly, monitor those changes for a reasonable period of time. Thus, was born the corporate deferred prosecution agreement (DPA) and its adjunct, the Independent Monitor.”[13] Monitors are commonly associated with DPAs and other types of agreements commonly found in civil matters such as Final Judgments and Settlement Agreements. Monitors have been used in cases involving well-known companies such as Volkswagen, Walmart, Apple, Odebrecht, Braskem, and Microsoft. The Securities and Exchange Commission (SEC) has also used monitors in enforcement actions, such as in its action against WorldCom in the early 2000’s and in 2019 with the DOJ (Department of Justice) in appointing a Foreign Corrupt Practices Act compliance monitor in a matter involving a supplier of global dialysis products and services. The use of monitors is increasingly common in state courts as well, and they are sometimes used in cases when there is no criminal prosecution involved. Monitors have been used in civil state cases, in certain multi-state matters, to oversee conditions of mergers, antitrust, false claims and Medicaid Fraud.