This June has been memorable. Earlier this month, the U.S. Supreme Court issued an important decision on the federal False Claims Act (FCA) that provided a bit of a mixed bag for nonprofits. Recently unsealed pending cases may provide important guidance as federal courts begin the task of implementing Escobar in relation to federal funding recipients—particularly those with an international presence. Further, the Financial Action Task Force (FATF) updated its recommendations to regulating countries regarding money laundering and terrorist funding in nonprofits. The U.S. General Services Administration (GSA) also made notable changes to key provisions of the Federal Supply Schedule (FSS) contract that GSA FSS contractors should review.
Renewed Expectations for NGOs: Preventing Money Laundering and Terrorist Financing
On June 27, 2016, the FATF revised its recommendations to include: "Recommendation 8: Non-profit Organizations." FATF is an inter-governmental policy-making body that sets forth international standards for anti-money laundering and anti-terrorist financing by making recommendations to countries for the establishment of national policies.
Recommendation 8 specifically asks countries to review their laws and regulations governing nonprofits. Although Recommendation 8 is not itself a regulation for nonprofits to follow, it provides valuable insights for nongovernmental organizations (NGOs) and other nonprofits into the measures that may be expected by grant makers and regulators in preventing serious financial misdealing.
Importantly, FATF recommends that NGOs be required to exercise "reasonable" due diligence for parties giving to and receiving funds from nonprofits, but FATF goes on to say that NGOs should not have to meet the higher "Know Your Customer" standard of financial institutions. Given the uncertainty of a reasonable due diligence standard, funding agencies may be looking to the FATF standards as a guide. NGOs should review their current policies and practices for the prevention of money laundering and terrorist financing, including:
- Confirmation of the identity of people who control activities and funds, such as senior managers and board members;
- Confirmation of the identity and credentials of beneficiaries and those receiving funding;
- Monitoring on-the-ground activities;
- Full accounting of funds;
- Use of regulated financial systems wherever feasible;
- Documentation of the identity of significant donors while respecting their confidentiality; and
- Retention of records of transactions for at least five years, with sufficient detail to verify funds received and expended.
While not directly addressed in the FATF standards, policies should be practical, as measured by a risk matrix to determine what parties, places, and activities require respective levels of scrutiny. A policy also should include a process for evaluating and reporting suspicions of funding misuse to appropriate management and authorities.
In addition, governments are also encouraged by FATF to conduct training, require licensing and financial reporting of NGOs, and develop investigative expertise.
Along these lines, Venable will be holding a global anti-corruption controls luncheon/program and webinar for nonprofits on September 20, 2016 to discuss these and similar issues, as well as internal controls and compliance considerations. For more information and for registration, click here.
The Importance of Developing a Compliance Process for Performing under Federal Grants and Contracts
The U.S. District Court for the Southern District of New York recently unsealed a lawsuit against a contractor accused of defrauding the U.S. Agency for International Development (USAID) for projects seeking to rebuild Pakistan's infrastructure following the 2005 earthquake (Case No. 1:14-cv-09107). In particular, the contractor is accused of not providing qualified personnel, billing for hours not performed, and failing to provide the promised project supervision, all of which resulted in substandard work at an excessive cost.
Meeting contractually agreed-upon labor qualifications, accurately recording time, and sufficiently monitoring a project may appear to be requirements that are relatively basic and, in many respects, simple to ensure. Nevertheless, nonprofits overseeing contractors, and contractors themselves, inadvertently fail to meet these requirements. Furthermore, while the recent Escobar decision makes clear that the FCA is not intended to be used to enforce basic contract terms, it is clear that the U.S. Justice Department and federal agency Inspectors General will be examining the goods and services the parties fundamentally contracted for (i.e., the reason for the contract), and whether the failure to disclose noncompliance undermines the parties' representations related to those goods and services.
For these reasons, we advise clients (or their contractors) that before starting work on any project, that a team review the applicable federal agreement (whether grant, cooperative agreement, or contract) and the associated regulatory requirements and develop a compliance matrix that lists the key requirements, as well as the person responsible for ensuring compliance with each key provision. The process itself will help to provide a defense against allegations of "reckless disregard," the standard under the FCA, and create greater internal accountability. This process will help both the nonprofit and the federal government clarify which provisions are ambiguous. For example, with the heightened standards of oversight set forth under the Uniform Guidance, nonprofits need to establish clear standards with their government customers on what level of oversight is required—particularly for work done in distant places. The process also may highlight the requirements the organization may need to seek an exception for, such as seemingly insignificant labor qualifications. Any deviation of labor qualification should be approved by your grants agreement officer in writing.
Finally, since the above-referenced matter was initiated through the qui tam whistleblower mechanism under the FCA, we continue to stress to nonprofits that they must develop and publicize a compliance program, educate their workforce (and their contractor's workforce) on the program, and create strong channels through which employees, vendors, and/or business partners can report their problems. This then gives the organization the ability to review and appropriately address concerns, rather than making employees feel that they must approach a federal agency to avoid their own personal liability.