Now you have me worried. If I did not offer him anything, how could I be held responsible for colluding with him?
I understand the risk of being painted with the same brush. This is all the more infuriating because there are other people, more senior than him at this organization who seemed enthusiastic about the project.
Don't screw around. You've described yourself as the sole witness the commission of a serious crime. Passivity and/or trying to resolve this "politely" in back channels can bite you by making you an accomplice. If it really was as bad as you describe - your next call should be to the FBI and you should prepare for that by writing down every detail you remember, as carefully and accurately as you can.
I am going to write it down. I will have to think a lot and come to an agreement with my partner before I can decide to talk non-anonymously to the authorities.
You can talk anonymously to the authorities. They may not be able to do much but at least they can keep an eye on the guy. There is an organization called the Office of Special Investigations. They handle this kind of stuff. Letting them know the activity exists might be enough to get them to open an investigation and watch the guy.
Isn't he better off just walking away from this (and yes OP: forget the sale)?
Per his own account here, he (a) discussed potential issues with "hiding" the kickback, and (b) tentatively agreed to discuss the possibility with his "by the book" partner.
I am not questioning your righteous outrage here, but this is a can of worms if there ever was one. And I'm just guessing that the sleaze ball in DC acted that way because its likely a norm in the seat of our government. (Would that really surprise you?)
Just to clarify, I did not "discuss" potential issues with hiding a kickback. When I mentioned that his employer may not allow his "consulting" with us, he rattled off a bunch of ways he could hide it and I responded by asking him to check the legality of it. To any sane person the message that I did not want to do this would have been obvious. The fact that he ignored it tells me that he thought he could bulldoze me into paying him (because he does not seem dumb).
What I precisely told him, and I was careful about this, was that he should investigate the legality of doing this and I would discuss the same with my by the book partner. I wasn't clear about his in the original text, but my survival instincts did kick in and I remember telling him this precisely.
Further thinking has left me wondering how he would have responded to a simple "Sorry buddy, don't take it personally but we can't do that. How's the steak?". It may have been the better thing to do. But if he had continued bulldozing it would have ended up in a similar place.
As an aside, I have never paid even for a coffee for a government employee who is a potential customer. It is not that I do not know the rules. I just wish I had been more familiar with the playground and had thought about what I would do in a situation like this beforehand. Hopefully this will serve as an opportunity to do that for other entrepreneurs who read this.
It sounds like you did the best you could after being hit with a pretty big curve ball.
Had this happened to me, I think I would have approached it by saying something to the effect of "Look buddy, we're a small outfit, we couldn't really do things this way even if we wanted to. How you usually manage your affairs is none of my business, but I think it would be best for us both if we just forget this conversation ever happened." End of story. So still a firm "no" but also indicating that I'm not interested in making trouble and just wish to be left alone. In this kind of situation, sure there's the question of the greater good not being addressed (i.e. he can go on being corrupt), but sorry, the good of me and mine comes first. There will be corrupt people around for as long as there are people around.
But if I were to find myself in the position you're in now where it seems the guy still may harbour some ambitions that he may still have an in with you, on the one hand I wouldn't really want to keep interacting with this guy because the more I would it kind of feels like it could be construed later on as some form of collusion. But at the same time I would be very careful about exposing him before getting legal advice, because who knows if this guy might go all vindictive and try to take you down with him. From what you've said, it seems like it would be yours and your partner's word against his, two witnesses on your side is better than one I guess, but these "his word against yours" kind of things seem to have a way of sometimes getting very messy if they ever hit a court room. I'd be looking to avoid that possibility.
Get some senior legal advice ASAP! Fuck the greater good, do what's best for you and your partner! Good luck with it!
P.S. I do also think though that there's a difference between supplying a bribe and buying a client a coffee or something. The latter and things like it can be part of building a relationship and there's nothing wrong with that. You just need to make sure that this kind of thing stays at a certain reasonable level.
You have my sincere sympathies (and I have no clue what I would have done in your shoes; its one of those moments where clarity arrives in hindsight and self-kicking ensues and we've all been there) but you entered the spider's web as soon as you met with him outside of his office. He knew exactly what he was doing; you didn't.
Live and learn.
But lets be honest here: "Please check the legality of your proposed hiding of your proposal for our paying you to be our secret consultant and meanwhile I'll run this by my by the book partner"? (And I'm just a (sympathetic) fellow geek on HN; I'm trying to make a point regarding careless escalation of this matter beyond anonymous posts on HN ...)
It is imperative that you consult a lawyer regarding this matter even if you and your partner's intent is to simply drop the sale cold, walk away, and cut your loses; call the FBI; go on Oprah; whatever.
First, you can't be too paranoid: perhaps his firm was being investigated and the bribe proposal was false.
Second, if the bribe offer was serious and that guy has any power, now his firm has a nervous enemy in the wrong place.
Third, if the bribe offer is taken up by someone else, he makes it less likely that he can get future contracts anywhere near that arm of government without making bribes.
Fourth, the corruption is independently reported by some third party, then it may come back to haunt his firm (as in questions about what they knew about it, when).
I understand the risk of being painted with the same brush. This is all the more infuriating because there are other people, more senior than him at this organization who seemed enthusiastic about the project.