COVID-19 Federal Assistance e311


Due Diligence & Fraud Protection

What due diligence should a municipality conduct on federal funding grantees?

With the passing of numerous Coronavirus relief packages, local governments have received and will receive tens of millions of dollars from multiple funding sources that are then often passed on to subrecipients. A 2009 report issued by the U.S. Department of Justice (“DOJ”) Office of the Inspector General, entitled “Improving the Grant Management Process,” stated that the initial stage of any grant program is the most important. The plan to manage, monitor, and oversee a funding program should be well developed from the outset, to avoid difficulties adequately implementing or monitoring the program.[1] Below are examples of some suggested steps to consider in order to strengthen the management of grant programs, including disbursements of funds to subrecipients. These steps may help prevent the misuse of funds and minimize the chances of claw backs.

  1. Leadership: Hiring or contracting a grant administrator with relevant experience and the requisite familiarity with the Code of Federal Regulation.
  2. Transparency: Improve transparency with a data management system which serves as a central repository of information that: (i) accounts for the receipt and distribution of all grant funds; (ii) tracks the source and beneficiary of the funds; and (iii) justifies the proposed use of the funds. A central repository can also help identify and prevent duplication of benefits.
  3. Risk Assessment: Analyze the terms and conditions of the subaward and conduct risk assessments of subrecipients to evaluate noncompliance risk. The assessments can also be employed to help determine the appropriate levels of oversight.[2] The following are examples of due diligence measures to be considered for inclusion in risk assessment:
    • Require subrecipients to complete a pre-award risk assessment questionnaire that will help determine the level of risk. The DOJ has provided a sample risk assessment questionnaire to help formulate and tailor specific assessment questionnaires – DOJ Sample Risk Assessment Questionnaire.
    • Perform basic due diligence checks such as a SAM database search to determine if a person or entity is on the Federal government excluded parties list, as well as searches for recent liens, judgments, bankruptcy filings, etc.[3] Cities can consider leveraging locally based resources for due diligence expertise including banking and financial institutions, law enforcement, and regulatory agencies.
    • As part of the self-certification process, require the disclosure of all grant funds previously received as well as pending grant applications. Cities can consider accessing Federal and Local agency data sources and databases to randomly test the accuracy of these disclosures.
  4. Subrecipient Agreement: Execute a subrecipient agreement or contract with the awarded entity. The following information can be considered for inclusion in the subrecipient agreement:
    • Right-to-audit clause to provide future access to books and records maintained by subrecipients.
    • Cooperation clause that obligates the subrecipient to cooperate with any future government review, audit, or investigation.
    • Acknowledgement by subrecipients of having read and understood the Federal grant requirements laid out in 2 CFR 200.[4]
    • Language detailing the mechanism for the recovery of misspent grant money.
    • Language describing the service to be provided and how it fits into the permissible uses of the grant program.
    • Language requiring subrecipients to perform their own due diligence of employees, subcontractors, and vendors.
    • A certification that the information contained in the grant application and the subrecipient agreement is true and accurate; any false statements made as part of the certification or application process will be prosecutable under the law.
  5. Oversight and Monitoring: It was noted in a DOJ National Procurement Fraud Task Force (“NPFTF”) report entitled “Best Practices for Combatting Grant Fraud” that grant awarding agencies are often focused on awarding the grant money and do not dedicate sufficient resources to the oversight of how those funds are spent.[5] The report noted that awarding agencies often fail to: (i) sufficiently audit and review supporting documentation for grant expenditures; (ii) establish performance goals for programs; (iii) ensure that grantees submit performance data to demonstrate that grant monies are being used effectively and as intended; and (iv) properly closing grants in a timely manner. In order to detect and address program vulnerabilities before they potentially become systemic, cities can consider proactively performing oversight, auditing, and monitoring of their grant programs, including funds expended by subrecipients.
  6. Information Sharing within and among Agencies: The NPFTF report also noted that coordination and communication will help: (i) identify issues which cut across management sectors; (ii) spot problem-grantees that accept awards from more than one agency; (iii) identify common fraud schemes; and (iv) provide opportunities for coordination and cooperation in outreach and training. Cities may consider finding opportunities to maintain regular contact with Local, State, and Federal agencies to exchange lessons learned and to share best practices.

Last Revised: May 4, 2021