In April 2016, we saw the unveiling of a new disclosure program by the U.S. Department of Justice (DOJ), a report from the U.S. Government Accountability Office (GAO) presenting alarming numbers concerning undisbursed grant funds, and a reminder of the need for nonprofits to keep an eye on the ethics requirements of the states (as opposed to the federal requirements we often discuss) in which they do business.
DOJ Launches FCPA Pilot Program
In a memorandum issued on April 5, 2016, the DOJ's Criminal Division, Fraud Section unveiled a one-year pilot program under which organizations can receive substantial mitigation credit for self-reporting violations of the Foreign Corrupt Practices Act (FCPA). However, to be eligible for such credit, borrowing heavily from the Yates Memo, organizations must meet a prescriptive set of requirements—voluntary self-disclosure, full cooperation, and remediation:
- Voluntary self-disclosure requires a fulsome and timely disclosure of "all relevant facts about the individuals involved in any FCPA violation," which mirrors the language of the Yates Memo. Importantly, however, a disclosure that an organization is required to make by law or agreement is not considered voluntary. This is particularly noteworthy to federal contractors and grantees who may be subject to other reporting obligations under FAR 52.203-13 or the Uniform Guidance.
- Cooperation also mirrors the Yates Memo, requiring "disclosure on a timely basis of all facts relevant to the wrongdoing at issue, including all facts related to involvement in the criminal activity by the corporation's officers, employees, or agents." In addition to the Yates Memo, full cooperation credit also requires "[p]roactive cooperation, rather than reactive"—that is, disclosing information and evidence beyond what is requested or known to exist by the government; document and information collection and preservation; continued updates; making company personnel available for interviews; and other conditions as warranted and/or requested.
- Remediation would generally require an organization to implement an independent and effective compliance and ethics program; discipline employees responsible for misconduct, which may include discipline for those personnel who failed to supervise the responsible employees; consider the discipline's effect on compensation; and take any additional appropriate measures needed to avoid the recurrence of misconduct.
In addition to the foregoing, organizations would need to disgorge all profits resulting from the violation.
For these efforts, the DOJ may decline to prosecute, discount the fine imposed by up to 50% off of the low end of the U.S. Sentencing Guidelines fine range, and/or avoid the imposition of a third-party monitor.
At the end of the one-year pilot period, the Fraud Section will determine whether to extend or modify the program. If the program expires, the pilot program framework will still apply where organizations initiated self-disclosure and cooperated during its brief existence.
While disclosure programs always carry with them the hope of a reasonable partnership between an organization and the government, the DOJ's FCPA one-year pilot program carries with it high bars across its requirements, and appears to disqualify a number of would-be participants out of the gate because of potential (albeit unclear) reporting obligations under other regulations. Moreover, at the outset of the Fraud Section's memo, it makes clear its continued commitment to increase enforcement and prosecution of FCPA matters. As such, organizations should be well informed of the requirements and potential benefits before seeking entry into the DOJ's FCPA pilot program.
GAO Finds Actions Needed to Address the Timeliness of Grant Closeout and Undisbursed Funds
On April 14, 2016, the GAO issued Report No. GAO-16-362, titled Grants Management: Actions Needed to Address Persistent Grant Closeout Timeliness and Undisbursed Balance Issues. This report followed up on a study concerning FY2011 data whereby the GAO found that while the sheer number of grant accounts within the Payment Management System (PMS)1 with undisbursed funds decreased from 10,548 to 8,832, the amount of undisbursed funds increased by approximately $200 million since the FY2011 data, totaling approximately $994 million in undisbursed funds.
Agency officials explained to the GAO that closeout delays occur for various reasons, including grantee delays, such as grantees' failure to submit final financial and performance reports; and agency failure, including delays in reviewing, processing and reconciling grantees' final reports. Regardless of the cause, by any measure, it is clear that federal agencies' closeout procedures are in dire need of improvement, as nonprofits and other grant recipients are left to finance delayed payments and closeout at their own risk and expense.
The GAO recommended that the Office of Management and Budget (OMB) resume a previous practice where it would instruct agencies to report undisbursed balances for expired grant accounts. The GAO also recommended that the U.S. Department of Health & Human Services (the largest offender with respect to these undisbursed funds, accounting for approximately 66% of the undisbursed amount) require its grant-making divisions to identify grants that have expired more than one year past their period of performance end date and close those grants or determine why they are not closed. The OMB and the agencies agreed with the GAO's recommendations.
These findings are particularly notable for nonprofits, many of which cannot carry unpaid disbursements for very long. As a result, nonprofits should develop internal policies to do their part to minimize delay in closing out grants and obtaining final payment:
- Know your grant terms and the timing and substantive requirements for your final financial and programmatic reports. Your organization should not be reviewing these requirements once performance has concluded or even days before conclusion; rather, these reports should be considered well in advance, so necessary information is considered and collected during the performance of the grant.
- Ensure responsibility for preparing these reports is clearly and practically assigned. In other words, ensure those assigned the responsibility have the time, resources and expertise required to prepare closeout reports.
- Confer with agency counterparts to ensure your organization meets the expectations for final reports and includes explanations and data that will better enable them to process and close out your grant.
- Promptly and thoroughly respond to agency inquiries and requests. If you are uncertain of what is being sought, call and discuss with your agency contact.
Finally, do not be afraid to call and prompt your agency counterpart on the closeout status, and offer to assist or provide any information needed to facilitate closeout.
Be Mindful of State Ethics Requirements Too
We typically spend a good portion of our monthly newsletter focused on federal grant and contract issues; however, a recent development in Florida underscores the need for nonprofits to keep an eye on compliance issues as they arise with states and local governments with which they do business. In particular, in late March, Governor Rick Scott signed a state law (H.B. 7071), which, among other things, expanded the state's public corruption laws to include "public contractors," a term that is inclusive of nonprofits so long as they contract with the State of Florida.
While the corruption concerns of Florida are certainly laudable, the application of such standards to public contractors (e.g., nonprofits) and how they conduct themselves apart from their conduct with the state is certainly an expansion of traditional ethics rules. As such, nonprofits should ensure their policies and procedures, as well as ethics training, are updated to reflect the various nuances with which the organization does business and/or within the jurisdiction in which it does business. After all, there have been instances where the failure to comply with ethics requirements of applicable state and local governments has served as a basis for federal suspension and debarment.