June 2015

Federal Grant and Contract News for Nonprofits - June 2015

Unique Issues Facing Nonprofit Recipients of Federal Grants for Overseas Programs

6 min

Unique Issues Facing Nonprofit Recipients of Federal Grants for Overseas Programs

As a condition to receiving federal funds, nonprofit federal grant recipients and subrecipients agree to comply with the applicable federal requirements, which include the prudent management of all expenditures. These requirements apply regardless of where the nonprofit federal grantee conducts its operations; however, working abroad presents unique challenges, which can create additional compliance issues. In this month's newsletter, we discuss some of the most prevalent issues facing nonprofit recipients of federal grants for overseas programs and provide tips for addressing and mitigating such issues and their risks.

Knowing Your Environment

Given the recent broad increase in activity by federal Inspectors General (IGs) and the identification of federal grant fraud as one of the top challenges that federal IGs must deal with in the years to come, recognizing fraud and other improprieties is critical for U.S.-based grantees operating abroad. However, detecting such misconduct can be particularly difficult if your organization does not have a physical presence in or is not familiar with the country, locality, or industry in which you are working. Indeed, as USAID has acknowledged in its fraud awareness handbook, it is difficult to detect "an aberration if you don't know the norm." Thus, it is important for grant recipients to be aware of general red flags, as well as red flags specific to the locale in which they are working. For example, appropriate due diligence may require you to consider the following:

  • Whether the particular country is prone to corruption (a number of organizations, including Transparency International, annually report such information).
  • Whether the U.S. government conducted a risk assessment in the country at issue (USAID publishes these reports on its website). If so, did the U.S. government find "patterns that would indicate possible bid-rigging, collusion…or other illegal activity" in the awarding of contracts or grants?

If the above inquiries yield evidence that a country is prone to or has a high degree of corruption or unethical conduct, your organization should approach work in the country and locale with a well-developed plan for ensuring program integrity. However, even if the results of the above inquiries are inconclusive or do not indicate corruption, your organization's diligence is not complete.

Conducting Due Diligence on Employees and Subrecipients

As a result of the increased enforcement mentioned above, it is also critical that nonprofit grant recipients ensure that any individual or subrecipient working on its behalf is properly vetted. In fact, the vetting of subrecipients is particularly important in light of the Super Circular’s imposition of more stringent subrecipient monitoring requirements. Conducting this due diligence overseas can be challenging, particularly if your organization does not have a local office. In such cases, it may be helpful to obtain an opinion from local counsel or another reliable source, such as the local U.S. embassy or consulate, about the potential employee’s reputation and qualifications.

It is also advisable to consider the following questions:

  • Did a government official recommend the potential employee?
  • Is the potential employee a former government official or related to a government official?

Federal grant recipients may want to consider the following additional questions:

  • Does the potential subrecipient have a code of conduct?
  • Has the subrecipient established an accounting system or a mechanism for creating financial reports?
  • What is the subrecipient's document retention policy, if any?

Note that while the U.S. government funds a number of programs in developing countries that do not have the same cultural norms or well-developed infrastructure or industry, USAID and other federal agencies require grant recipients to meet the ethical and cultural norms of the United States, and often expect administrative processes that are very similar to what would be found stateside. At times these requirements can be extremely difficult to meet in order to achieve programmatic success; however, they are, unfortunately, an obligation that is accepted with federal funds. Accordingly, it is imperative that your organization set the standard.

Setting the Standard

Though countries have increasingly adopted anti-corruption policies during the last several years, many countries' anti-corruption policies and ethics rules differ from those of the United States. Thus, it is important that your employees and subrecipients agree to abide by your code of ethics/conduct, the Foreign Corrupt Practices Act (FCPA), document retention policies, and any other applicable laws. Be certain that your code of ethics/conduct is current and that your employees understand important laws, such as the FCPA, and flags for identifying instances of potential noncompliance. Of course, consequences for noncompliance, whether applicable to employees or subrecipients, must be put in place to ensure accountability.

Ensuring Accountability

It is important not only that your employees, subrecipients and their employees agree to abide by your code of ethics/conduct and any applicable laws, but also that you ensure accountability through proper implementation of such policies, e.g., employee and subrecipient training/periodic retraining and compliance audits.

  • Training. To ensure compliance with applicable statutes and regulations, nonprofit federal grant recipients should ensure that their employees as well as their subrecipients are sufficiently trained and periodically retrained. It is worth inquiring whether the agency from which you receive funding offers country-specific training. For example, USAID offers training on fraud awareness in many countries (either in person or through video).
  • Audits. Subrecipients also should conduct periodic compliance audits and be aware of agency-specific regulations. For example, 2 CFR § 700.12, applicable to awards from USAID, explicitly requires all negotiated contracts above the simplified acquisition threshold (currently $150,000) to include a provision requiring pass-through entities, USAID, and the U.S. Comptroller General to have access to certain contract-related records. Because of this specific requirement, grantees working with USAID risk disallowance for such contract costs if these provisions do not exist contractually. Consequently, USAID grant recipients must ensure that their subrecipients abroad are maintaining adequate records.

Complying with All Grant Requirements

Nonprofit grantees should carefully review their grant agreement, be familiar with applicable laws and regulations, and prepare a compliance matrix to assist the organization in meeting all of its grant requirements. Some specific compliance issues include:

  • Discussing Exchange Rate Fluctuations. Nonprofit grantees must submit their reports in U.S. dollars; however, the country in which you work may operate only in the local currency. Because of the potentially rapid fluctuation of exchange rates, it is important to discuss the applicable exchange rate with your subrecipient, as well as the U.S. government, to avoid disputes over which party will bear the risk of exchange rate fluctuations.
  • Abiding by the Fly America Act (and other domestic preference requirements). The Fly America Act requires all travel funded by the federal government to use "U.S. flag" airlines, with a few exceptions.

While there are many opportunities for federal funding for work overseas, nonprofits must be mindful of the heightened enforcement and monitoring regime and the particular compliance challenges that accompany those opportunities.