We agree with you, it is very sad indeed.

We hesitate to address these kind of questions here at AAP because they are so factually dependent.  That said, to answer your question there absolutley is an obligation to report. Someone could be held liable for not reporting under the doctrine of "constructive knowledge".  There are many regulations which codify this.  Examples include:

Principles of Ethical Conduct for Government Officers and Employees - Presidential Executive Order 12674, April 1989 and the Employee’s Oath of Office.

Department of Defense: Joint Ethics Regulation (DoD 5500.07-R) and Standards of Conduct (DoDD 5500.07)

United States Office of Government Ethics (OGE) is another fantastic reference.

FAR subpart 7.5 and DFARS subpart 207.5 discuss Inherently Governmental Functions.  FAR part 3 and DFARS part 203 discuss improper business practices.

We recommend you seek the guidance of your KO on this.  You may also discuss it with your organizational contracting/fiscal law attorney or even the Inspector General.