The University of Florida recently agreed to pay $19,875,000 to settle an alleged civil False Claims Act (31 U.S.C. § 3729) violation brought by the U.S. Department of Justice (DOJ), on behalf of the U.S. Department of Health and Human Services (HHS). According to DOJ, the university overcharged employee salaries to a grant, inflated the cost of services performed by an affiliate, and directly charged equipment and supplies that were not within the scope of the relevant grant. The university first discovered some of the issues in 2006 during an internal audit of the school's grant-reimbursement system. Although the school made some changes to its reimbursement system at that time, the government first learned of the incident in 2009 during a routine federal audit.
This case is a strong reminder that the federal government is increasingly interested in reviewing the integrity of its federal awards to nonprofit grantees, including universities. Principal Deputy Assistant Attorney General Benjamin C. Mizer publicly stated that the "settlement demonstrates that the Department of Justice will pursue grantees that knowingly divert those funds from the project for which they were provided." A representative of the Office of Inspector General for HHS stated that "prudent oversight of those funds is absolutely essential."
The case also demonstrates how important it is for nonprofits that receive federal funds – including grants and cooperative agreements, along with contracts – to promptly and appropriately respond when a noncompliance and/or potential overcharge first comes to their attention. In nearly all instances, it is much better for a nonprofit grantee to make the government aware of the potential issues rather than wait for a government auditor to detect the issue independently. As discussed below, how an organization incorporates the mandatory disclosure rule into its compliance program will often determine the outcome of a potential noncompliance issue.
The Mandatory Disclosure Rule
As we have explained previously, the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance) now require that all federal assistance awardees disclose, in writing, "violations of criminal law involving fraud, bribery, or gratuity violations potentially affecting the Federal award" (2 C.F.R. § 200.113). An organization's failure to make the required disclosure could result in the government suspending or debarring the organization, among other consequences. Because of the significant penalties for failing to comply, nonprofit grantees should consider the following strategies for implementing policies related to the Mandatory Disclosure Rule.
- Consider disclosure of a broader panoply of noncompliances. Although the federal rules for grantees require disclosure only for a criminal violation of fraud, bribery, or gratuity, any nonprofits with federal contracts, where credible evidence is found, must disclose potential violations of the civil False Claims Act or significant overcharges (e.g., the Federal Acquisition Regulation's disclosure requirement). Notwithstanding the clear difference in disclosure standards, Inspectors General do not always consistently apply the standards, and appear to expect nonprofit grantees to report far more than what would be specifically covered by the disclosure requirement under the Uniform Guidance. As a consequence, nonprofit grantees may want to consider a broader application of the disclosure requirement in order to avoid having a trust-sapping technical dispute with their partner agency, where the underlying noncompliance rises to the level of credible evidence of a civil false claim.
- Establish a reporting mechanism within your organization, for employees and subawardees. Nonprofits should establish a reporting system that fosters internal reporting of potential concerns, including reports from subawardees, subcontractors, agents, and vendors. Some agencies are now requiring (or expecting) subawardees to report their own matters directly to the government. A nonprofit must carefully review its award for any heightened reporting standards and know and understand its agency's expectations. If a heightened reporting system exists, nonprofits should incorporate into their subagreements the requirement that the nonprofit is notified, where possible, prior to any such report, and, at the very least, conjunctively. Of course, any reporting mechanism should include an anti-retaliation policy to protect current employees from adverse employment action in response to good-faith reports.
- Establish an investigation strategy. Nonprofits must consider who in the organization will lead an investigation into allegations, and when the organization will reach out to outside counsel to avail itself of the attorney-client privilege. Although government officials often counsel nearly immediate disclosure, the federal standard generally permits awardees time to perform an investigation prior to disclosure, and it is strongly recommended that the investigation and disclosure occur within the context of a well-developed strategy.
While the mandatory disclosure provision of the Uniform Guidance is new, the concept of voluntarily reporting certain noncompliances to the federal government is not. As a result, experienced federal award recipients have a good deal of insight into the nuances of the requirements, the consequences of failing to comply, and tips and best practices for establishing workable and effective investigation and disclosure strategies. Nonprofits that do not have this know-how, given the University of Florida settlement, would be wise to consult with knowledgeable individuals or organizations to ensure they have appropriate policies and procedures in place.
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.