JULY/AUGUST 1999 · VOLUME 20· NUMBER 7 & 8
CORPORATE CRIME IN THE '90S
Scofflaws or Blacklisting?
The Clinton Administration's Proposed
"Responsible Contractor" Regulation
In what may be one of its most important corporate accountability initiatives (there haven't been many), the Clinton administration has proposed that chronic violators of labor, environmental, tax, antitrust, consumer or employment laws should be denied the privilege of entering into contracts with the federal government.
Business groups are up in arms about a proposal that public interest groups have tagged "the anti-scofflaw regulation." The U.S. Chamber of Commerce, along with an alphabet-soup full of business trade associations, has constituted the cleverly named National Alliance Against Blacklisting (NAAB) to oppose the proposal.
Both are sides are peppering the General Services Administration with comments on the proposal, though critical comments from business are vastly outnumbering those from citizens or citizen organizations favoring the proposal. The public comment period on the regulation closes on November 8, after which the Clinton administration will review the comments and either implement the proposal or revise it and solicit a new round of public comments.
It appears likely that the administration will adopt the regulation, unless the business community is able to generate a massive movement against the regulation, or unless Republicans in Congress move legislatively to bar enactment.
Two years later, the administration decided to move forward, this time with a broader proposal.
Current procurement regulations require government contractors to meet a "responsibility" standard, but it is a standard that has been weakly applied, if at all. In July, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council proposed amending the regulation to provide examples of corporate records that fall within the existing definition of "an unsatisfactory record of integrity and business ethics."
The proposed rule says that "examples of an unsatisfactory record may include persuasive evidence of the prospective contractor's lack of compliance with tax laws, or substantial noncompliance with labor laws, employment laws, environmental laws, antitrust laws or consumer protection laws."
According to the proposed rule, "These examples are premised on the existing principle that the Federal Government should not enter into contracts with contractors who do not comply with the law."
The logic of the responsibility determination, according to the proposal, is that "an efficient, economical and well-functioning procurement system requires the award of contracts to organizations that meet high standards of integrity and business ethics and have the necessary workplace practices to assure a skilled, stable and productive workforce."
These seemingly modest regulatory changes have generated such significant controversy because so much is at stake. The federal government spends approximately $200 billion a year on procurement, buying goods and services from firms that employ approximately 20 percent of the U.S. workforce. Government contracts make up a significant revenue stream for many firms, including many of the largest companies in the United States.
It is clear that the government currently contracts with repeat violators of the law.
Nine of the top 100 corporate criminals of the 1990s (ranked by size of fine paid in connection with a guilty plea in a criminal case) were among the 200 largest federal government contractors in 1998.
A Multinational Monitor investigation has found that the largest federal contractors routinely violate workplace safety regulations. In a study of the 25 largest for-profit defense contractors and the 25 largest for-profit civilian contractors which were not among the largest defense contractors, Multinational Monitor found that, since 1994, the Occupational Safety and Health Administration (OSHA) has cited 30 for one or more serious violations. OSHA issues "serious" citations to companies for conditions posing "a substantial probability that death or serious physical harm could result." Six companies among the group of 50 were cited for "repeat" violations, and three for "willful" violations (issued where "the evidence shows either an intentional violation of the [Occupation Safety and Health] Act or plain indifference to its requirements").
Of the 50 companies, 20 have received more than 10 serious citations since 1994. Nineteen companies have paid more than $10,000 in OSHA fines. OSHA has hit seven companies -- Boeing, TRW, General Electric, Allied-Signal, Textron, ITT and Avondale -- with more than $100,000 in fines.
These findings complement a 1996 study by the General Accounting Office (GAO), the congressional research agency. The GAO study found that 261 federal contractors, receiving more than $38 billion in federal government business in fiscal year 1994, received penalties of at least $15,000 for violating OSHA regulations.
A 1995 GAO study reported similar results for violations of labor law. The 1995 study found that 80 federal contractors, receiving more than $23 billion in federal government business in fiscal year 1993, had violated the National Labor Relations Act. Six contractors -- McDonnell Douglas, Westinghouse, Raytheon, United Technologies, AT&T and Fluor -- received almost 90 percent of the $23 billion.
Labor unions and public interest groups view the federal procurement lever as a desirable tool against contractors who are chronic lawbreakers especially because of the minimal penalties attached to corporate lawbreaking. The standard sanction imposed against a company that fires a worker for supporting a union is an order to reinstate the worker with back pay (minus pay the worker received from any interim work prior to reinstatement) -- there are no punitive damages available. Serious violators of workplace health and safety regulations typically walk away with small fines.
Even in areas where penalties are more severe, such as antitrust and environmental enforcement, by and large crime still pays: few analysts believe the fines are sufficiently large to deter wrongdoing.
The anti-scofflaw regulation, advocates believe, should prod greater corporate respect for the law because so much is at stake in government procurement decisions.
"By seeking to politicize federal procurement, the administration is putting the needs of the AFL-CIO and trial lawyers ahead of the interests of American workers," said Thomas J. Donohue, president of the U.S. Chamber of Commerce in the July 1999 kickoff announcement of the NAAB.
"NAAB is dedicated to defeating blacklisting and protecting the integrity of the federal contracting process," he said. "At stake is the responsible stewardship of taxpayer dollars, the job security of millions of workers -- both union and nonunion -- and the economic well-being of communities across the country."
But, bluster aside, the business opponents of the regulation face a difficult challenge. As Deidre Lee, administrator of federal procurement policy, emphasizes, the anti-scofflaw regulation asks only that government contractors obey the law -- a position to which it is hard to object.
Nonetheless, the NAAB has crafted a clever set of arguments.
The NAAB questions the ability of procurement officers to make the judgments on contractor responsibility required by the anti-scofflaw regulation. Because the anti-scofflaw regulation does not precisely define what constitutes a record of "substantial noncompliance" with the law (the trigger for activation), the NAAB alleges that the rule would bestow on procurement officers the power to select contractors arbitrarily. The NAAB also says the regulation "reflect[s] a 'guilty before proven innocent' attitude," since it permits procurement officers to consider evidence of law-breaking in cases where a court or administrative body has not issued a final judgment of contractor guilt.
But Lee argues that officers who already make complicated determinations in awarding contracts are sufficiently sophisticated to make responsibility assessments, and do not act arbitrarily in making decisions based on current factors. And the Washington, D.C.-based OMB Watch notes that appeals processes do exist for companies which believe they are unfairly denied contracts.
The NAAB also contends that contractors could be unfairly penalized for failing to comply with confusing and technical federal rules. This argument seems misplaced, however, since background information accompanying the regulatory proposal explains that companies would be disqualified "not for isolated or trivial" violations but only for "repeated and substantial violations establishing a pattern or practice by a prospective contractor."
For the advocates of the regulation, however, the business concern is actually an attractive feature. For its advocates, the main weakness of the anti-scofflaw regulation stems from the source of the NAAB's purported anxiety: the fact that the regulation does not provide specific guidance as to what constitutes "substantial noncompliance" with the law.
Public interest advocates at OMB Watch and elsewhere believe procurement officers are likely to be inhibited in enforcing the regulation -- after all, it appears that strict adherence would require denial of contracting opportunities to many of the largest federal contractors, and many of the largest and most powerful corporations -- and that the uncertainty surrounding the meaning of "substantial noncompliance" will make contracting officers even more reluctant to conclude that potential contractors fail the "responsibility" test.
To remedy this potential problem, they are urging the Clinton administration to adopt guidelines specifying what set of violations would cause companies to flunk the test.
In the absence of such guidelines and meaningful enforcement, however, many proponents believe the anti-scofflaw regulation would be beneficial for two reasons.
First, even if intermittently enforced, the anti-scofflaw rule could exert a meaningful deterrent effect.
Second, as business fears, it should provide a tool to activists and unions conducting corporate campaigns: if they can demonstrate a record of repeated lawbreaking, they will be able to demand contracting officers block their targets from receiving new contracts.