COVID-19 Federal Assistance e311


Due Diligence & Fraud Protection

What due diligence should a municipality perform before allocating ARP funds to third parties?

The ARP has not yet provided specific guidance regarding due diligence related requirements. However, it may be helpful for cities to study due diligence protocols and expectations based on lessons learned from other funding sources, including the Coronavirus Relief Fund (“CRF”). This could prove useful when a city is preparing to distribute COVID relief funds to vendors, community groups, and other entities or individuals.

Generally, with respect to all federal funding, recipients are expected to demonstrate that costs covered by federal awards are: (1) compliant with the terms and conditions of the award, (2) necessary and reasonable for the completion of the activity of the award, (3) clearly allocable to the award, and (4) clearly documented.[1] Due diligence in the selection, management, and oversight of vendors, community groups, or other entities and individuals fall under the general expectation of an entity’s role as a recipient of federal funding.

The due diligence efforts suggested below are based on prior experiences with the CRF, HUD funding, and other federal relief programs.

Cities might consider the value of the following programmatic and fiscal due diligence measures based on their individual circumstances and needs:  

  • Review lessons learned from any previous COVID and/or other federal award, including the review of audits applicable to Federal funding.
  • Establish internal controls, identify potential areas of risk, and perform duplication of benefits analysis prior to award and/or distribution of funds.
  • Ensure vendors and/or sub-recipients are eligible to receive federal funding by utilizing Exclusionary Search prior to award and/or distribution of funding.
  • Include a self-certification form for vendors and/or sub-recipients which certifies that, among other things, the vendor or sub-recipient is not barred from receiving funds and are eligible, capable, and responsible in the management of federal funds.
  • Perform a risk analysis, duplication of benefits analysis, and award justification (i.e., why a vendor or sub-recipient was selected and approved for distribution of COVID Relief funds).[2]
  • If awards to vendors or sub-recipients – including community groups, individuals, or other entities – are made in a competitive manner or establish requirements for vendors or sub-recipients as a condition to receive funding, establish specific policies or procedures to document that those condition(s) are met prior to award or distribution of funding.
  • For example, if an entity’s use of COVID Relief funds is designed to provide support to small businesses to mitigate the economic impact of COVID and a program identifies that economic hardship is a condition of award, be sure to establish a process to document that the requirement is met and is consistently applied to all awardees of that program.
  • Develop and adhere to policies and procedures and other programmatic documentation.
  • Work with partners and ensure processes and controls are in place, including invoicing, procurement, and any technology systems that will be used to carry out your program.
  • The recipient of COVID Relief funds is responsible for communicating the terms and conditions of funding to the relevant vendors and/or sub-recipients.[3] Roles, responsibilities, and expectations – including those pertaining to documentation, reporting, and compliance – should be clearly identified in the sub-recipient agreement, contract, and the organization’s policies and procedures.   Be sure to communicate any changes, clarifications, or additions to requirements for vendors and/or sub-recipients in writing.
  • Ensure costs and/or proposed budgets for vendors or sub-recipients are necessary and reasonable for the activity provided. (Cities can use previously approved contracts or general market standards to ensure that costs and/or budgets are reasonable. The general principle is that the cost, price, or budget is consistent with what a prudent person would pay for that item. This is a generally applicable standard for demonstrating due diligence before funds are awarded or distributed, or in the review of reported costs.)
  • Monitor programs, contractors, sub-recipients, etc. at an early stage, while preparing for an eventual monitoring or audit.
  • This includes but is not limited to desk reviews using the following guidance from the Department of the Treasury Office of the Inspector General, titled: Coronavirus Relief Fund Prime Recipient Desk Review Procedures OIG-CA-21-004R dated March 22, 2021.[4]

Last Revised: April 14, 2021