Oct. 1, 2014 SIGN IN | REGISTER

Pay-to-Play Violations Carry Serious Penalties

Q: I 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.”

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