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Due Diligence & Fraud Protection

What are some of my city’s obligations and responsibilities to prevent fraud related to ARP funds?

Municipalities are responsible for ensuring that federal funds are used for their intended purposes and should establish internal controls designed to provide reasonable assurance of compliance with applicable laws and regulations.[1]

Federal funds may be at risk of several types of fraud, including embezzlement, bribery, and false statements. Recipients must establish and enforce strong control systems and increase awareness among relevant people of common fraud schemes. [2]

The U.S. Department of the Treasury (“Treasury”) has provided resources to help recipients understand their responsibilities to try to prevent fraud and abuse, including guidelines set forth in the American Rescue Plan Act of 2021 (“ARP”) and the CSLFRF Interim Final Rule (the “Rule”). Most notably, on June 17, 2021, Treasury released the Compliance and Reporting Guidance to assist recipients with CSLFRF reporting requirements and deadlines. To clarify how and what to report, on August 10, 2021, Treasury released a document on “Treasury’s Portal for Recipient Reporting” which includes a section on Frequently Asked Questions.

Each municipality should develop policies and procedures that address the unique risks of fraud to which they are exposed, taking into consideration their plans for using funds received under the ARP. Important resources include:

If municipalities identify instances of fraud or potential fraud, they must notify the federal awarding agency or pass-through entity of all violations of federal law. [3]

Municipalities are subject to annual external audits that will, in part, assess the adequacy of its internal controls.[4] Municipalities shall periodically report detailed accounting of their use of funds from ARP.[5]

Below are some other measures that municipalities should consider to help prevent fraud:

  • Ensure that no costs under ARP programs are also being claimed or used by other federal, state, local, or private funding sources. Using a grants management software system can be helpful in attributing costs to a specific funding source, which can be reviewed for eligibility. Municipalities must prevent costs from being unintentionally claimed under multiple funding sources.
  • Identify a policy subject matter expert(s) or point person to monitor and review guidance updates from Treasury and answer eligibility questions to ensure that all costs are allowable under ARP requirements and to confer with Treasury when costs do not clearly align with the program’s guidelines. This designated point person can assist in the coordination of efforts to comply with ARP guidelines in each step of program implementation.
  • Document the use of funds and key decisions made by leadership on how ARP-funded programs will be designed, implemented, and reviewed for compliance with the terms and conditions of the funding source. Documentation requirements will differ among programs. It is critical to document: (i) policies and procedures regarding procurement and contracting; (ii) the methodology for evaluating and awarding ARP funds to subrecipients; (iii) financial controls; (iv) documentation management; and (v) evaluation of potential conflicts of interest.[6] It is critical to maintain an accurate narrative which will illustrate the municipality’s decision-making process and demonstrate how funds meet the requisite eligibility requirements, terms, and conditions
  • Perform a risk assessment of internal controls to identify areas of vulnerability to fraud. Implement a risk mitigation plan to address fraud vulnerabilities identified in the assessment.
  • Ensure vendors are not prohibited from working on federally funded contracts prior to initiating contracts for services. Vendors can be checked by various sources, including SAM.gov’s advanced database.[7]
  • Review and re-train employees on relevant conflict of interest policies, including those related to the evaluation of potential contracts or awards for subrecipients funded by federal dollars.[8]

Municipalities providing ARP funding to subrecipients or vendors must clearly communicate the rules, requirements, and expectations of the funding source to the subrecipient or vendor. When drafting contract language and/or funding agreements for the distribution of ARP funds to subrecipients, municipalities should consider including language that, at a minimum:

  • ensures subrecipients are not receiving other available funding for the same costs, or mechanisms to recoup funds that may have been duplicated by another source;
  • establishes the expectation that subrecipients will document compliance with any terms and conditions set forth by Treasury and the subrecipient’s contract or funding agreement with the city;
  • requires subrecipients to report detailed costs and provide supporting documentation to confirm eligibility prior to final payment. Expectations regarding what documentation will be required should be clearly communicated to the subrecipient or vendor;
  • requires subrecipients or vendors to cooperate with any local or federal review, audit, or investigation (e.g., cooperation clause). Such cooperation might include, but is not limited to, the production of documents and making individuals available for interviews during the life of the contract; and
  • requires subrecipients or vendors to allow access by local or federal agencies to audit the books and records related to the funding provided during the life of the contract (e.g., right to audit clause).

Last Revised: August 24, 2021