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Part 3 of 4: How Do I Do It? Preparing a Disclosure

This month's newsletter continues our four-part discussion of how a nonprofit organization might respond to an instance of potential noncompliance. The following case study is the basis of our continued analysis, which outlines basic steps for reviewing and investigating a reported noncompliance. Last month, we discussed steps one should consider taking when addressing a reported noncompliance. After having performed an inquiry or investigation and determining that a reportable incident occurred, we now focus our attention on the disclosure an organization might make.

Case Study Reminder

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 and indicates that several other persons were involved, but provides no specifics on the hours that may have been inflated and/or estimated, or on the number of affected programs. The Central City office 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.

In last month's newsletter, we walked through the investigation, whereby we also learned that while timekeeping noncompliance occurred, it was limited to three individuals, but applied to all four programs. Perhaps most fortunate, it appears that these individuals were not purposefully inflating their time, but rather were routinely rounding up their time (against company policy) and sometimes estimating their time because they did not understand the importance of accurate timekeeping. Furthermore, because all three of the individuals at issue were relatively new to the organization, the noncompliance dated back only eight months. In response, the organization took immediate steps to train these individuals on the importance of timekeeping policies and reviewed and updated its new hiring training program to better emphasize accurate timekeeping. The organization has maintained all of the documents it collected in the course of the investigation.

With this information in hand, what should the general counsel do?

Assessing the Need to Disclose

When preparing to make a disclosure to a funding partner, it is critical to understand the requirements of any such disclosure, including whether there is an affirmative requirement to disclose a noncompliance. As discussed in the first newsletter of this series, federal awards (i.e., grants, cooperative agreements and/or contracts) have certain disclosure requirements and varying disclosure thresholds. This, however, may not be the case for state or privately funded arrangements. Nevertheless, even if an affirmative disclosure obligation does not exist, the noncompliance, if discovered, may result in a breach of contract claim or undermine the grantee's relationship with its agency. Therefore, as a general rule, it is typically a good idea to consider disclosing noncompliances to your funding partners, regardless of whether there is a specific, affirmative obligation.

In our hypothetical situation, the noncompliance implicates federal grant funds in three of the funding instruments, and a fourth does not include an affirmative disclosure obligation, but does include language that requires accurate timekeeping and billing. Accordingly, given that the investigation suggests that timekeeping and the corresponding invoices were not accurate, raising this issue with the private funding partner is advisable.

Before disclosing, the organization, with the guidance of legal counsel, should fully understand the issues and the potential consequences of a disclosure. Depending on the type of noncompliance and the harm to the funding entity, a disclosure can set off a chain reaction of events that may result in substantial exposure to the organization, as well as individuals. This can include both civil and criminal penalties, as well as potential administrative action (i.e., suspension or debarment). Part of the conversation, however, must acknowledge that, should the organization fail to disclose a known noncompliance, if it is later discovered, the decision not to disclose will significantly increase the likelihood of civil, criminal and/or administrative action, or, at the very least, decrease the federal government's confidence in the organization.

The Anatomy of a Disclosure

With the above considerations in mind, it is generally advisable to include the entire context that led to a noncompliance. This allows the disclosing party the ability to explain itself and demonstrate to the funding partner that the disclosing party 1) has truly diagnosed the problem; 2) has taken the appropriate steps to mitigate the problem; and 3) can still be trusted as a responsible steward of the funding partner's funds. While some federal agencies provide disclosure forms, these are typically the "check-the-box" type, which leads little room for detailed narratives, and we generally counsel against using them. For example, organizations should consider including background on the disclosing organization's business generally and its history with the funding partner (including their joint successes) and, of course, background on the specific project at issue, including any related challenges or difficulties experienced along the way (with reminders of those instances where the disclosing party previously apprised the funding partner of such challenges or difficulties). Similarly, it is critical that the disclosing party fully explain the particular facts and circumstances that led to the noncompliance. In this way, the organization is able to fully contextualize any noncompliance, placing it within the appropriate context of its relationship with the organization and its overall internal control structure.

Of equal importance to the explanation regarding the disclosure are the actions an organization takes after learning of the issue. The federal government is inevitably looking to determine how the organization responded to the noncompliance and whether those steps will be effective in minimizing or eliminating similar issues in the future. Key to this portion of the explanation is tying in the corrective actions to the actual noncompliance. If an agency feels the corrective actions are cosmetic or fail to address the root cause of an issue, the agency may not be satisfied with the response and may have continuing concerns. Furthermore, because not all actions can be or should be implemented immediately, taking a measured and methodical approach is usually acceptable, as long as the disclosure explains why a program or practice may take time to implement.

Additional Considerations

As explained in our first newsletter in this series, the requirement to disclose under a federal grant is very different form that under a federal contract (criminal violations versus credible evidence of a civil federal False Claims Act violation). Nevertheless, in our hypothetical scenario, it is clear that our organization has overcharged the federal government, and that it may be subject to civil False Claims Act scrutiny. Thus, while it may not be specifically required by the Uniform Guidance (because the overcharging alone may not be tantamount to a criminal violation), it is advisable that the matter be raised with the granting agency.

Here, DoEd is the federal funding entity under three affected programs. Although the funding agency is the same, it is not uncommon for each funding agreement to be administered by a different grants officer. Thus, the organization should ensure that it submits the disclosure to the correct individuals. When multiple disclosures are necessary, the disclosing party should consider whether to make a single disclosure to all officials (i.e., putting all officials on notice of the issues the organization has under other funding arrangements) or an agreement-specific disclosure to each cognizant official.

In presenting its disclosure, the organization also may consider providing back-up calculations so the federal government officials can review the calculation. Often, by being upfront about difficult issues, an organization can provide a sense of confidence that it has handled the matter appropriately and short-circuit greater inquiry and scrutiny from the agency, potentially avoiding a federal inspector general or U.S. Department of Justice investigation.

To Be Continued…

Having made the disclosure to DoEd , as explained above, next month we will discuss some of the follow-up questions and/or actions that may ensue and thoughts and strategies for addressing them.

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DoD First to Bar Contracts from Contractors that Prohibit Employees from Reporting Waste, Fraud, and Abuse

On November 14, 2016, the U.S. Department of Defense (DoD) issued a class deviation to the Federal Acquisition Regulation (FAR) that prohibits contracting officers from awarding contracts to contractors that prohibit their employees from reporting waste, fraud, and abuse to federal officials. This class deviation seeks to implement section 743 of Division E, Title VII of the Consolidated and Further Continuing Appropriations Act, 2015 (Pub. L. 113-235) and successor provisions in subsequent appropriations acts (and as extended in continuing resolutions). Section 743 prohibits the use of funds appropriated under or otherwise made available by Division E or any other Act for a contract, grant, or cooperative agreement with an entity that requires employees or subcontractors of such entity seeking to report waste, fraud, or abuse to sign internal confidentiality agreements or statements prohibiting or otherwise restricting such employees or subcontractors from lawfully reporting such waste, fraud, or abuse to a designated investigative or law enforcement representative of a federal department or agency authorized to receive such information.

To date, the Uniform Guidance has yet to be amended to implement Section 743, but prohibitions of this sort appear to be forthcoming. For more information on the DoD class deviation, please click here.