Several case developments in early 2015 serve as reminders to nonprofits of the Federal Government's increased use of enforcement actions and the best practices that a nonprofit should implement to promote transparency with the Government and within its organization.
USAID Suspends Key Nonprofit Award Recipient
The U.S. Agency for International Development (USAID) recently suspended one of the largest nonprofit recipients of USAID funds—International Relief and Development (IRD)—from receiving future Federal Government awards. The suspension followed an internal USAID review through which USAID questioned IRD's present responsibility because of USAID's assertion that IRD engaged in performance misconduct and lacked the appropriate internal controls required for recipients of Federal funds.
IRD's suspension is symptomatic of Federal agencies' increased emphasis and willingness to pursue suspension and debarment remedies against all recipients of Federal funds. This trend mirrors the trend in the contracting community, which has experienced a significant uptick in suspensions and debarments in recent years across all agencies. It also demonstrates that no grantee is "too big" to debar or suspend. Indeed, prior to its suspension, IRD was one of USAID's key award recipients that undertook large humanitarian projects in Iraq and Afghanistan.
The Federal Government suspends (temporarily prohibits future awards to an entity) or debars (prohibits future awards, typically up to three years) an organization when it determines that the organization is not "presently responsible." These administrative actions are aimed at protecting the Federal Government's interest and preventing taxpayer funds from falling into the hands of allegedly unscrupulous award recipients.
Suspension and debarment proceedings are initiated by a suspension and debarment official (SDO) in a particular agency. SDOs may debar an entity for a myriad of enumerated "causes," including convictions or civil judgments for certain offenses related to fraud, a violation of the terms of an award that affects the integrity of an agency program, as well as any other cause of so serious or compelling a nature that it affects a grantee's responsibility. An SDO may suspend an entity if the entity has been indicted for, or other adequate evidence exists to suspect, any of the causes for debarment. For a suspension, the SDO also must determine that "immediate action is necessary to protect the public interest."
False Claims Act Case Reminds Nonprofits to Implement Internal Whistleblower Procedures
Earlier this month, in Gary Siebert v. Gene Security Network, Inc., No. 3:11-cv-01987-JST (N.D. Cal. Feb. 4, 2015), a federal jury found that a grantee that allegedly submitted false claims to the National Institute of Health in relation to a Federal award did not violate the False Claims Act (FCA). Under the FCA, 31 U.S.C. § 3729 et seq., any person who "knowingly" presents or causes to be presented a false claim for payment shall be liable to the United States for civil penalties of $5,500 to $11,000 plus three times the amount of damage sustained by the Federal Government. According to a former employee, the grantee made misstatements to the Government about its ability to track workers' time, claiming that the organization's lack of internal controls prevented it from determining whether the grant money was spent properly. A former employee of the grantee brought the suit as a qui tam action.
Under the qui tam provisions of the FCA, private individuals that know an organization has submitted a false claim to the Federal Government can file an FCA case on behalf of the Government. The Government then chooses whether it will participate in the matter or not, but irrespective of whether the Government participates, the private citizen may continue the lawsuit. Successful qui tam relators are given a percentage of any eventual FCA recovery. The Gary Siebert case serves as a reminder that any grantee may be subject to costly qui tam actions from current or former employees. To manage these cases, nonprofits should implement policies, procedures and practices to foster and encourage employees to report concerns internally, thereby giving the organization the opportunity to review and appropriately address the matter, including disclosing certain misconduct to the cognizant agency officials.
Takeaways for Nonprofit Award Recipients
Given the broad range of offenses that may trigger a suspension, debarment, or other enforcement or qui tam actions, nonprofit award recipients should consider the following prophylactic actions:
- Develop policies and procedures that encourage employees to voice their concerns internally or through a hotline that the organization has established.
- Train employees on the importance of ethical conduct, their obligation to perform their duties in conformance with Federal requirements, to ask questions when in doubt, and the importance of reporting concerns. Any communication plan should consider continually updating employees on lessons learned from prior incidents and the organization's handling of negative audit findings or internal reports, when appropriate.
- Establish a protocol for timely and appropriately responding to negative audit findings and/or internal reports.
- Determine a process and responsibility that identifies which internal reports are handled, including periodic reporting to senior management and the board, and when specific incidents require discussion with senior management and the board.
- Implement policies and procedures that meet Federal award requirements. Recall that the Super Circular requires mandatory disclosure to the Federal Government for violations of Federal criminal law involving fraud, bribery, or gratuity violations potentially affecting a Federal award.
- Establish a plan for periodically assessing and reassessing risks of noncompliance. The assessment should focus on whether your organization's internal controls provide reasonable assurance that you are managing Federal awards in compliance with Federal statutes, regulations, and the terms and conditions of the nonprofit's awards.
In addition to the foregoing, it is also important for organizations to involve legal counsel (whether it be in-house or external) at an early stage in these matters so as to preserve the attorney-client and work-product privileges to the greatest extent practicable.