When a contractor, vendor, or supplier of a municipality’s CSLFRF grant award commits fraud, is the municipality required to establish new internal oversight controls for future award?

Recipients and subrecipients are the first line of defense and responsible for ensuring that Coronavirus State and Local Fiscal Recovery Fund (“CSLFRF”) award funds are not used for ineligible purposes, and there is no fraud, waste, or abuse associated with their CSLFRF award.[1] A municipality is not necessarily required to establish new internal controls when a contractor, vendor, or supplier of a municipality’s CRF grant award commits frauds; however, an assessment of the facts should be conducted to determine if deficient internal controls made it easier for the fraud to be committed. If so, a municipality should implement additional oversight controls to prevent the reoccurrence of the same or similar fraud schemes.

Federal awarding agencies are initially responsible for ensuring that specific Federal award conditions are consistent with the program design and include clear performance expectations of recipients. In addition, the Federal awarding agency or pass-through entity may adjust specific Federal award conditions as needed, based on a risk analysis. If the analysis indicates the possibility of noncompliance, including fraud, waste or abuse, the federal awarding agency, the U.S. Department of the Treasury (“Treasury”), may impose additional award conditions as outlined in the Uniform Guidance section 200.208, which include:

(1) Requiring payments as reimbursements rather than advance payments;

(2) Withholding authority to proceed to the next phase until receipt of evidence of acceptable performance within a given performance period;

(3) Requiring additional, more detailed financial reports;

(4) Requiring additional project monitoring;

(5) Requiring the non-Federal entity to obtain technical or management assistance; or

(6) Establishing additional prior approvals.[2]

If Treasury subsequently determines that noncompliance with the specific Federal award conditions has occurred, Treasury may take additional actions, outlined in the Uniform Guidance section 200.339, which include:

(a) Temporarily withhold cash payments pending correction of the deficiency by the non-Federal entity or more severe enforcement action by the Federal awarding agency or pass-through entity.

(b) Disallow (that is, deny both use of funds and any applicable matching credit for) all or part of the cost of the activity or action not in compliance.

(c) Wholly or partly suspend or terminate the Federal award.

(d) Initiate suspension or debarment proceedings as authorized under 2 CFR part 180 and Federal awarding agency regulations (or in the case of a pass-through entity, recommend such a proceeding be initiated by a Federal awarding agency).

(e) Withhold further Federal awards for the project or program.

(f) Take other remedies that may be legally available.[3]

Treasury’s Reporting and Compliance Guidance provides internal controls and good practices with descriptions and examples. These include implementing an “enhance[d] eligibility review of subrecipient with imperfect performance history” and a “higher degree of monitoring for projects that have a higher risk of fraud, given program characteristics.”[4] Ultimately, the best strategy to prevent fraud, waste, and abuse is to regularly review internal controls for areas of vulnerability and improvement.[5]

Last Updated: March 6, 2023