Understanding 7 CFR 3017 & 7 CFR 3018

Even experienced procurement professionals can become confused when delving into the world of government contracts for the first time.  Code of Federal Regulations (CFR), agency specific rules, define the responsibilities of recipients of both federal funding and direct federal contracts.  CFRs house rules pertaining to every stage of a contract procurement relating to government contracts.  This memo only addresses how and when recipients of federal funding, like RUS borrowers, must comply with the debarment and suspension rules and restrictions on lobbying in their contracts for procurement of goods and services. 

Debarment & Suspension Rules

The debarment and suspension rules grew out a response to President Reagan’s 1986 Executive Order 12549 instituting a government-wide initiative to curb fraud, waste and abuse in Federal programs and increase agency accountability, the Department of Agriculture drafted 7 CFR 3017 containing the debarment and suspension rules for non-procurement transactions.   Non-procurement is specifically defined in the regulations at 7 CFR 3017.970 as any transaction, excluding direct procurements with the federal government, including but not limited to grants, cooperative agreements, scholarships, fellowships, contracts for assistance, loans, loan guarantees, subsidies, insurances, payments for specified use and donation agreements.   

If your company receives any of the above referenced government funding, subsidized treatment or government backed guarantees, then the debarment and suspension rules are directly applicable to your organization.  As a recipient of federal funding, your organization owes several duties to the Department of Agriculture. 

First, prior to even receiving a non-procurement award, your first obligation to the Department of Agriculture is to certify that your organization or the principal on the prospective project is not currently excluded or disqualified.  An excluded person or entity refers to one who has been suspended or debarred by the Department of Agriculture or any other federal agency pursuant to each agency’s applicable regulations, whereas a disqualified person or entity is isolated to those who have been restricted through statutes, executive orders or any other official authorities from participating in federal programs.  Disqualification is mandated by an official authority while exclusion is discretionary within each agency.  Additionally, you as a prospective participant must disclose to the federal agency from which you are applying for aid or funding whether your organization or your principal have been criminally convicted within the past three (3) years for conduct enumerated in 7 CFR 3017.800 or have had any civil judgments rendered against you for conduct enumerated in the same section, whether your organization or principal is presently indicted or charged, both criminally or civilly, with any of the offenses referenced in 7 CFR 3017.800, and whether your organization or principal have had a federal, state or local contract cancelled with the preceding years for cause or default.   Chiefly, the Department of Agriculture is concerned with whether your organization has run afoul of the key standards of good faith and fair dealing in your regular business dealings.

Your obligation to make these disclosures to the Department of Agriculture extends throughout the life of your non-procurement activity.  For example, if you have a loan from RUS due in 2020, your disclosure obligation extends until that loan has been repaid.    In the event that your organization or principal have a change in circumstances which would alter your initial response to any of the disclosure inquiries referenced above necessitating a new disclosure, you must provide the Department of Agriculture written notice of such additional information tending to incriminate your organization.  Failure to make the requisite disclosures at any time in the process could result in the termination of the transaction and could also potentially result in your suspension and debarment from future government transactions in both procurement and non-procurement transactions.  Debarment could be devastating to your organization as your exclusion from all government-wide contracts could last for up to three years. 

            Secondly, you have a regulatory obligation to do business with responsible individuals when entering into “covered transactions” where federal money is funding procurement activities for goods or services.  This requirement mandates that prior to entering into a “covered transaction,” participants in non-procurement transactions that are using federal funds actively determine whether the individuals in which they are about to do business are excluded or disqualified.  A procurement contract for goods or services will be considered a “covered transaction” under the regulations if a participant in a non-procurement transaction awards a procurement contract for goods or services and either the non-procurement award demands agency consent of all lower tier transactions or the amount of the contract is expected to equal or exceed $25,000.  Please note that the regulations specifically state $25,000 and make no reference to terms provided in other federal guidelines like small purchase threshold or simplified acquisition threshold.

In validating the accountability of a party to a covered transaction, the agency gives three options for the participants making the determination:  checking the Excluded Parties List System (EPLS), collecting a certification from individuals or adding a clause or condition to your contracts stating that the individual represents and warrants that he or she is and will remain eligible to participate in government contracts throughout the duration of the contract.  The EPLS is a publicly available source managed by the General Services Administration (GSA) which houses information regarding the disqualified and excluded individuals.  You may access EPLS through the Internet at http://epls.arnet.gov or subscribe to a printed version by calling the Government Printing Office Inquiry and Order Desk at (202) 783-3238. 

            Finally, 7 CFR 3017.330(b) requires participants to non-procurement transactions to mandate incorporation of the debarment and suspension rules into all contractor’s subcontracts which either require consent or are expected to exceed the $25,000 threshold, as well as create the obligation on the procurement contractor to determine the accountability of all its subcontractors in accordance with any of the methods stated above.  The inclusion of these clauses in a subcontract would not be subject to any negotiation, unless the subcontractor simply walks away from the negotiations altogether. 

            In the event that you find that your organization or principal or your business partners are excluded individuals, please be mindful that there are regulatory procedures that allow you to seek an exemption from the Department of Agriculture to enter into a contract or continue to fulfill a contract (7 CFR 3017.120) or appeal the excluded status (7 CFR 3017.720 - 890).  Please note that disqualification is not appealable under the Department of Agriculture’s regulations; however disqualification under a statutory scheme may not necessarily prevent the Department of Agriculture from entering into a non-procurement transaction with a participant nor will it automatically prevent a participant from entering into a contract with a disqualified lower tier participant.  The regulations emphasize disclosure allowing some room for agency flexibility if the parties act candidly in the initial disclosure phase.

Restrictions on Lobbying

Restrictions on lobbying originated from the notion that it is improper for the government to subsidize special interests.  This principle of responsible government spending attempts to ensure contracts are rewarded fairly, thus securing the public’s trust in their government and in their elected officials.  Codified at 7 CFR 1726.17, RUS Borrowers complying with 7 CFR 1726 must adhere to the restrictions on lobbying contained in 7 CFR 3018.  These regulations place constraints on how recipients of federal grants, loans or cooperative agreement may use federal monies.  The regulations restrict the advocacy voice of recipients by prohibiting the direct or indirect use of funding to “pay any person for influencing or attempting to influence an officer or employee of any agency, a Member of Congress, an officer or employee of Congress, or an employee of a Member of Congress” in connection with the receipt, extension, continuation, renewal, amendment or modification of any federal contracts, grants, loans or cooperative agreements. 

There are three specific exclusions from the bar on the use of appropriated funding to lobby.  First, the Department of Agriculture allows an employee or officer to receive reasonable compensation if acting as an agency and legislative liaison as long as the liaison’s activities are not directly related to the federal opportunities.   Pursuant to 7 CFR 3018.200(c), permissible liaison efforts may include discussions with the agency concerning the value of products or services, any specifics related to the terms or conditions of sale, or the potential to adapt or create products or services for agency’s specific use or purpose.  Only prior to the official submission for federal opportunities may the legislative liaison discuss the proposal with the agency or provide information requested by the decision-making branch of the government awarding the federal money. 

The second exclusion the Department of Agriculture allows on the use of appropriated funds is for professional and technical services.  According to 7 CFR 3018.205 and 7 CFR 3018.300, you may reimburse employees, officers or other contracted individuals for professional and technical services rendered directly in the preparation, submission, or negotiation of any bid, proposal, or application for the federal opportunities or for professional and technical services related to your contractual or regulatory compliance with the terms of the federal arrangements.  This exclusion is limited to professional and technical positions rendering advice or providing analysis that affects either the technical or legal aspects of your submission and would not extend to those who are in professional or technical positions who are advocating the selection of your bid or proposal.  Contracted individuals who are not employees are not required to file the disclosure discussed below of their lobbying activities related to the federal award under which they are receiving reimbursements if their services were employed only in the preparation, submission, or negotiation phase of the federal procurement or non-procurement process.

The third exclusion for utilizing appropriated funds extends to the reimbursement for the reasonable compensation made to regularly employed officers or employees involved in the preparation, submission or negotiation of any bid, proposal or application for federal support. 

In making a request for agency consideration for a federal contract, grant, or cooperative agreement that exceeds $100,000 or a federal loan exceeding $150,000, you must certify that you have not and will not charge the government for costs you incurred to influence your receipt or continued receipt of the appropriated funding.  In addition, you must disclose, at the same time, whether you have made or have agreed to be made any payments using non-appropriated funds to attempt to gain influence over governmental decision-makers involved in managing and controlling federal appropriations.  Any subgrants, contracts or subcontracts under any of the aforementioned federal opportunities which exceed $100,000 must make the same certifications and disclosures concerning their lobbying activity related to the federal opportunity under which they have contracted.

The regulations do not limit an organization’s ability to lobby with non-federal resources, the regulations do require disclosure of any lobbying activities related to the receipt, extension, continuation, renewal, amendment or modification of any of the federal opportunities referenced above.  Disclosures are collected by the head of the Department of Agriculture and then submitted in a report to the Secretary of the Senate and the Clerk of the House.  The reports become publicly available unless the information is deemed sensitive because it pertains to intelligence or contains classified information.  

If you are asking the government for a commitment to insure or guarantee a loan exceeding $150,000, you must file a statement with the appropriate government party indicating whether you have made or have agreed to make any payments to influence or attempt to influence any government body in connection with receipt of the loan insurance or guarantee.  If you have made or agreed to make such payment(s), you must file a disclosure with the appropriate department or agency revealing the proposed or actual amount(s), the identity of the individual(s) attempting to influence government behavior and the government officers, employees or Members that are potentially being influenced.

After receipt of federally appropriated money, you must determine at the end of each calendar quarter whether any events have occurred which materially affected the accuracy of the information previously certified to or disclosed to the federal agency.  The regulations give examples of material changes to include an increase of $25,000 in the amount of private funds given to influence the receipt of federal funding, a change in the person lobbying, or a change in the parties being lobbied.

There are costly ramifications for noncompliance.  Failure to abide by the lobbying restrictions or amend the disclosures may result in a civil penalty of not less than $10,000 per infraction not to exceed $100,000.  In addition, the federal government reserves the right to pursue other remedies, possibly criminal sanctions, for the same conduct that was the basis for the imposition of any civil penalties. 

Conclusion

            If already receiving a federal grant of money, whether it is a loan, grant or cooperative agreement, you should consult the terms specific to your agreement before looking to the regulations.  The regulations contain a standard for conduct, however, each agency reserves the right to set conditions for receiving funds within the actual award documents.  Remember the intent of these regulations is to foster the public’s trust which rests upon the government being openly accountable for its decisions to enter contracts with responsible individuals like you.  Therefore, you must be particularly cognizant of the public’s trust when carrying out obligations under government contracts.