Part 1 of 4: Why Would I Have to Disclose? Disclosure Obligations for Federal Aid Recipients

This fall, we are dedicating four issues to a hypothetical case study involving a nonprofit organization that receives federal funds (as well as private funding). We will discuss its response to noncompliance issues and determine if, when, and how it must disclose noncompliance to the federal government. This month's newsletter sets the stage by laying out the varying disclosure regimes. Subsequent issues will focus on the following topics:

  • October – What Do I Do? Addressing a Potentially Disclosable Issue
  • November – How Do I Do It? Preparing a Disclosure
  • December – Now What? Liaising with the Federal Agency

Case Study

This morning, the in-house general counsel of a national educational nonprofit organization receives a report that several employees in its office in Central City, Middle State have allegedly been inflating and/or estimating their time cards on various educational programs. The report includes one name, but indicates that several other persons are involved and provides no specifics on the hours that may have been inflated and/or estimated, and the number of affected programs. The Central City office of our client has 20 employees who provide both direct and indirect support to four educational programs, of which two are funded exclusively by the U.S. Department of Education (DoEd); one is funded, in part, with DoEd funds and matching funds from the organization; and one is funded solely with private funds.

What should the general counsel do?

The Disclosure Basics—FAR v. Uniform Guidance

While there is no question that the allegations contained in the report are serious and require review, it is critical for the nonprofit to first determine the standards and obligations required under the impacted programs. For programs funded in part or wholly with federal funds, there are multiple and varied disclosure requirements.

Contracts and subcontracts financed with federal funds are subject to the Federal Acquisition Regulation (FAR), which provides at 3.1004(a) that contracts (and subcontracts) expected to exceed $5.5 million and require 120 days or more to perform shall include clause 52.203-13. This clause, Contractor Code of Business Ethics and Conduct, requires the "timely" written disclosure, to a cognizant agency's Office of Inspector General (OIG), of "credible evidence" that a principal, employee, agent, or subcontractor of the contractor has committed a violation of federal criminal law under Title 18 U.S.C. (e.g., fraud, bribery, etc.) or a violation of the federal False Claims Act.

The FAR, however, does not apply to federal grants and cooperative agreements. Grants and cooperative agreements are subject to the Uniform Administrative Requirements, Cost Principles and Audit Requirements for Federal Awards (Uniform Guidance), which includes a disclosure obligation that varies substantially from the FAR. Under the Uniform Guidance, all grant recipients are required to "timely" disclose in writing to the awarding agency (or pass-through organization) "all violations of federal criminal law involving fraud, bribery, or gratuity violations potentially affecting the federal award."

While both disclosure requirements mandate that the disclosure be "timely" and in writing, their similarity ends there. The most notable distinctions between the two reporting regimes include the following:

  • The FAR disclosure requirement mandates disclosures based on "credible evidence," which, as the FAR Council explained in the guidance implementing 52.203-13, means that contractors had the opportunity to conduct a preliminary examination to determine whether credible evidence in fact existed. A FAR contractor needs to disclose prior to determining an actual violation has occurred. Conversely, the Uniform Guidance requires disclosure of "violations" of certain laws. Violations are legal conclusions rendered by a judge or jury. Certainly this bar is high and would exclude mere whistleblower reports, such as that presented above, until after a judge or jury deemed (beyond a reasonable doubt) the allegation(s) true. Yet, from a practical standpoint, OIGs have made clear that they read and apply the Uniform Guidance's reporting obligation in a manner that is equal to the "credible evidence" standard under the FAR. Some agencies include this higher standard in the terms of the grant agreement. Until a nonprofit challenges an OIG and/or agency in a lawsuit, this broad interpretation is likely to persist.
  • The Uniform Guidance further limits its disclosure obligation to violations of "criminal" matters, leaving out civil violations of law, such as those claims and allegations that may be made under the federal False Claims Act. Again, while this distinction is great, OIGs generally appear to be narrowing the gap between these two standards by stretching criminality to include conduct that would typically be reserved for civil actions under the FCA.
  • Finally, the Uniform Guidance requires disclosures to be submitted to the awarding agency or the pass-through organization. The FAR, on the other hand, requires submission to the cognizant OIG, with a copy to the contracting officer. Indeed, this distinction is great, as contracting and grant officers are far more likely to view matters in a contract administration context, whereas OIGs are more inclined to allege fraud. It is also worth noting that a subrecipient is not even obligated, per the terms of the rule, to notify the federal government, but rather must notify the pass-through organization. In reality, however, OIGs again have been asserting authority beyond the plain text, demanding that disclosures under the Uniform Guidance be submitted directly to them.

Why Would I Have to Disclose?

Given the foregoing, upon receiving the allegation, our hypothetical nonprofit should determine the funding streams at issue and the obligations thereunder. Here, the general counsel looks at the entire funding instrument for each of the four revenue sources, including provisions incorporated by reference and referenced regulatory requirements. Three of the four programs involve federal grant funds. They do not appear to include federal contract dollars and do not include 52.203-13. Thus, our nonprofit is subject to the less rigorous disclosure requirements of the Uniform Guidance. With respect to the privately funded program, the nonprofit should review the agreement itself to determine the obligations the agreement may include, and ensure (to the extent it can, based on the documents) that it does not include federal or state funds.1

While the disclosure obligations under the Uniform Guidance appear less rigorous than the FAR, as explained above, in practice, the nonprofit would likely be best served by treating the obligations in a manner similar to the disclosure requirements under the FAR. In our experience, OIGs are quick to assert fraud and question the present responsibility of an organization that strictly adheres to their minimum obligations under the regulatory requirements. Although an OIG's overreach would seem ripe for a successful federal lawsuit, most nonprofits prefer as smooth a relationship as possible with their federal funding partner, and treating potentially disclosable issues with the utmost attention, care, and cooperation will aid the nonprofit in avoiding and/or mitigating further disharmony with its federal partner.

To Be Continued…

Now that we have established the regulatory and practical backdrop of the obligations and expectations of potential misconduct, next month we will delve into the steps for reviewing these timekeeping allegations to determine whether there is in fact a disclosable issue (i.e., credible evidence of misconduct).

Webinar Recording Available

September 20, 2016: How to Protect Nonprofits’ Federally Funded Programs with Global Anti-Corruption Controls

This program takes you beyond the four corners of the federal False Claims Act and Foreign Corrupt Practices Act to provide you with legal and practical solutions to protect your nonprofit's program integrity and revenue.

Upcoming Nonprofit Luncheons/Programs and Webinars

October 13, 2016: How Your Nonprofit Can Operate a Legally Sound Certification or Accreditation Program

November 10, 2016: Federal and State Regulators and Watchdog Groups Are Bearing Down on Charities and Their Professional Fundraisers: How to Prepare for the Regulatory Storm

December 12, 2016: Top Ten Risks Facing Nonprofits Operating Internationally, co-sponsored by Venable LLP and BDO