Indirect Costs

LSC permits recipients of Basic Field Grants to allocate a proportional share of another funding source's share of an indirect cost to LSC funds, where the other funding source "refuse[s] to allow the allocation of certain indirect costs to an award." 45 C.F.R. § 1630.5(g). A refusal can take several forms, such as a cap on the amount of indirect costs that can be allocated to a grant or a statement from a funding source that including indirect costs in the application budget will cause the application not to be competitive. A recipient may allocate a proportional share of another funding source's share of an indirect cost to LSC funds, provided that the activity associated with the indirect cost is permissible under the LSC Act, LSC appropriations statutes, and regulations. Recipients should develop a detailed methodology on how to use LSC funding in compliance with 45 C.F.R. § 1630.5 and Program Letter 18-2 if non-LSC funding sources refuse or limit indirect cost allocation.

Beginning with special grants awarded after January 2021, LSC will allow grantees to charge both direct and indirect costs to newly awarded LSC special grants. Entities applying for or receiving special grants should follow their normal accounting practices for both indirect and direct costs associated with special grants. For special grants awarded before January 2021, grantees will follow their already approved budgets, unless instructed otherwise by the LSC staff liaison for the grant. See Program Letter 21-01.

Reminder on Reasonable and Necessary Expenses

Expenditures by a recipient are allowable under the recipient's LSC grant only if the recipient can demonstrate that the cost was, among other things, "reasonable and necessary for the performance of the grant" and "allocable to the grant." 45 C.F.R. § 1630.5(a)(2) and (3). In determining the reasonableness of a given cost, consideration is given to, among other factors, "whether the cost is of a type generally recognized as ordinary and necessary for the operation of the recipient or the performance of the grant." 45 C.F.R. § 1630.3(b)(1).

Historically, costs determined to be unallowable by LSC have included flowers, alcohol, holiday cards, and gifts for staff, board members, and/or private attorneys such as cakes, shot glasses, or other promotional items or tokens of appreciation such as pens, t-shirts, or coffee mugs, LSC's new Financial Guide, currently in draft, introduces limited flexibility as to when some of these items might be allowable in certain circumstances. For example, flowers, cakes, and promotional items or tokens of appreciation may be allowable for fundraisers or recognition events for volunteer attorneys. Recipients should consult with LSC or seek an advance understanding under 45 C.F.R. § 1630.6(a) for situations that might justify using LSC funds for these expenses.

LSC Accounting Guide, § 3-5.4 -- Cash Disbursements

Recipients must establish cash disbursement procedures to ensure proper documentation and recordkeeping. All invoices and all supporting documents should be marked and recorded as paid or cancelled to avoid duplicate payment. All property purchased should be recorded in a property subsidiary record, which must include all necessary documentation and must agree with the general ledger property accounts.

Regulatory Concerns

45 C.F.R. Part 1611 -- Financial Eligibility

When assessing prospective clients' financial eligibility, recipients should use only the income exceptions allowed by LSC regulations and listed in their board-approved eligibility policy. 45 C.F.R § 1611.5. Recipients should ensure that training materials and program resources reflect approved and current LSC income exceptions in place. These include examples such as automated case management systems and/or supplemental intake forms and procedures to obtain information from applicants and groups to determine financial eligibility in a manner that promotes the development of trust between attorney and client. 45 CFR § 1611.7(b).

45 C.F.R. Part 1626 -- Restrictions on Legal Assistance to Aliens

Pursuant to 45 C.F.R. §§ 1626.6 and 1626.7, recipients must ensure that applicants and clients who are seen in person, as well as clients receiving extended services, execute a citizenship attestation or demonstrate alien eligibility and that all files contain the necessary documentation pursuant to CSR Handbook (2017 Ed.), § 5.5.

Program Letter 20-2 provides guidance on the options 45 C.F.R. § 1626.8 provides for recipients to document an applicant's eligible non-U.S. citizen status "in an emergency" when the applicant cannot provide the required documents. For example, recipients may use the § 1626.8 procedures to temporarily document Part 1626 eligibility for non-U.S. citizens when an applicant "cannot feasibly come to the recipient's office or otherwise transmit written documentation to the recipient" or otherwise "cannot produce the required documentation before commencement of the representation." The COVID-19 pandemic is an emergency under § 1626.8. Any permissible legal assistance in which delay could cause harm to a client is considered to be "limited emergency legal assistance" under § 1626.8.

45 C.F.R. Part 1635 -- Timekeeping

Recipients are reminded that, prior to January 1, 2022, time spent by attorneys and paralegals must be documented by contemporaneous time records that record the amount of time spent on each case, matter, or supporting activity. 45 C.F.R. § 1635.3(b).

Recipients are advised that, effective January 1, 2022, any attorney, paralegal, or other recipient employee whose work can be charged as a direct cost to the LSC grant must keep time according to the standards set forth in § 1635.4 (e.g., reflect the total activity for which the recipient compensates the employee, support the distribution of the employee's salary or wages among specific activities or cost objectives if the employee works on more than one award or an indirect cost activity and a direct cost activity, for cases contain a unique client name or case number, the amount of time spent on the case, a description of the activities performed, and the dates on which the employee worked on the case, for matters or supporting activities, the amount of time and type of activity on which the employee spent time and sufficient information to link the activity to a specific award or indirect cost amount).

Fraud Awareness

The Office of Inspector General ("OIG") issued several fraud alerts over the past year. The following are particularly critical for grantee awareness:

• Fraud Alert 20-0115-A-FA (September 1, 2020), Payroll Fraud and Contemporaneous Timekeeping
  • Timesheet fraud (e.g., lax payroll policies and procedures allowed an employee to enter and approve their own time entries).
  • Fair Labor Standards Act ("FLSA") misclassification fraud (i.e., misclassifying exempt employees as non-exempt under the FLSA and therefore eligible for overtime pay).

• Fraud Alert 20-0113-A-FA (October 2, 2020), Ransomware Attacks
  • Ransomware is a type of malware installed on a computer or server that encrypts files, making them inaccessible until a specified ransom is paid. It is typically installed when a user clicks a malicious link and opens a file in an email that installs the malware, or through "drive-by" downloads (an unintentional download of a virus or malicious software most commonly done through phishing emails) from a compromised web site.
  • The most effective defense against ransomware is creating a system of prevention and detection. A system of prevention and detection should include an updated firewall, appropriate spam filters, current data backups, and a risk awareness plan for staff. If a ransomware attack does occur, keeping current data backups should allow grantees to restore data and operations of systems and could greatly reduce the impact of an attack from crippling your organization.
  • To avoid such attacks, the LSC OIG recommends grantees consider adopting the cyber security recommendations developed by the FBI and the Federal Communications Commission (FCC) at https://docs.fcc.gov/public/attachments/DOC-306595A1.pdf. 

• Special Fraud Advisory (December 14, 2020), LSC Business Email Compromise Fraud Scheme
  • A business email compromise ("BEC") scheme is a fraud scheme that aims to trick employees into revealing sensitive information or into making payments based on fraudulent instructions.
  • Perpetrators can initiate a BEC scheme by compromising a company's email account or by spoofing a company's email account.
  • In part, recipients are advised to:
    • be alert to emails with hyperlinks that contain misspellings or changes of the actual domain name.
    • ensure multiple steps are taken to verify the identity of the person/company requesting a change to payment or money transfer information.
    • require at least two-part authorization (review and approval by more than one employee) for any requests related to changes in payments or money transfers.

Additional Information

If you have a concern or question regarding compliance with LSC regulations or directives, particularly the compliance areas noted in this Letter, please contact Lora M. Rath, Director of LSC's Office of Compliance and Enforcement, at rathl@lsc.gov or 202-295-1524. In addition, OCE can provide training upon request. Training requests should also be submitted to Ms. Rath.