United States: Federal Grant & Contract News For Nonprofits - August 2015

Last Updated: September 7 2015
Article by Dismas Locaria, Jeffrey S. Tenenbaum and Melanie Jones Totman

Since the beginning of the year, many nonprofit federal award recipients have been following the suspension of one of the U.S. Agency for International Development's (USAID or the Agency) largest nonprofit contractors—the International Relief and Development (IRD). This month, a federal judge ruled on the matter, finding that USAID violated the law, and that the Agency must undo its January suspension. While the eight-month saga legally resolved in its favor, IRD has been damaged, and USAID (despite a judicial order requiring such) is unlikely to be able to "undo" all of the harm that the suspension caused IRD. As a consequence, we devote this month's newsletter to some tips and guidance to avoid the irreparably harmful actions of suspension or debarment.

Background on the IRD Suspension

Since its formation in 1998, IRD had been one of USAID's biggest contractors. For example, between 2007 and 2013, IRD reported revenue north of $3 billion, with more than 75% of that revenue coming from contacts and cooperative agreements with USAID. On January 26, 2015, USAID suspended IRD from federal work after the Agency found "serious misconduct" in the organization's performance and management of federal funds. The suspension appears to have been the culmination of months of internal reviews by USAID, the Special Inspector General for Afghanistan Reconstruction (SIGAR), and the Federal Bureau of Investigation (FBI), as well as pressure from members of Congress. According to the Agency, its "review revealed serious misconduct in IRD's performance, management, internal controls and present responsibility."

In response to the suspension, IRD filed suit against USAID in June. Just weeks later, USAID lifted the suspension of IRD, admitting that it may have acted in violation of federal law. Specifically, USAID's suspension and debarment official also headed the Agency's acquisition office, thereby creating a potential conflict of interest. Notwithstanding the Agency's lifting of the suspension, IRD refused to withdraw its lawsuit, because of the harm that had been done by the Agency's error.

Tips for Mitigating Suspension or Debarment

While IRD ultimately prevailed in having the suspension lifted, and regardless of what Judge Lamberth ordered, nothing will cure the reputational harm done to the organization. Accordingly, nonprofits should keep the following items in mind so as to avoid the costs associated with a suspension or debarment.

  • When any sort of compliance deficiency, irregularity, or misconduct is discovered, review the matter closely (ideally under attorney-client privilege) and, where appropriate, develop an action plan to effectively address the issue. Follow up on the action plan to ensure the remedy resolved the matter, and document why the organization believes the issue is resolved.
  • Consider whether the deficiency is material and whether it triggers a reporting obligation under the FAR or the Uniform Guidance. If so, report the matter, but also be certain to include detailed information on what your organization has done to address the issue so that the government can be assured that the matter will not recur.
  • Even though you may have disclosed the matter pursuant to the FAR or the Uniform Guidance, consider whether the organization would benefit from reporting the matter directly to the cognizant agency's suspension and debarment official (SDO). Given the severity of suspensions and debarments, some organizations find that keeping an open dialogue with the SDO of its primary agency regarding any significant noncompliance strengthens the agency's confidence in the organization's reporting systems and overall internal controls. Of course, organizations should also be sure that the organization has actually engaged in noncompliant conduct before making such a report. However, it is always best for an SDO to hear a story for the first time from the contractor/grant recipient as opposed to an inspector general or an assistant U.S. attorney, particularly when the organization has already taken corrective actions to ensure future compliance.
  • Whenever reporting a matter to an SDO, understand that it is not meant to be a litigious environment, but rather that an SDO's responsibility is to make a business decision on the part of the federal government as to whether your organization is a "presently responsible" organization that can be trusted with federal funds. Accordingly, be sure to include information on your organization's "present responsibility," such as the overall internal controls practiced by your organization, as well as the corrective actions taken specifically to address the current situation.

While perfection is not always obtainable, at a minimum, the federal government expects proactive, good-faith attempts to rectify instances of noncompliance. As such, it is imperative that nonprofits act swiftly and effectively to address noncompliant conduct as it arises. Further, if the noncompliance is material, or if it is discovered by a third party, it may require raising the matter with an SDO. We could not address all of the possible nuances of navigating the suspension and debarment system, but arming yourself with the basic tenets outlined here will assist your nonprofit greatly, should you find yourself in these potentially unforgiving waters.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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