45 C.F.R. 1610 Program Integrity Compliance Guidance and Governing Body Certification
44 C.F.R. 1610 Program Integrity Compliance Guidance and Governing Body Certification
Ronald S. Flagg, President
August 26, 2022
Summary
This Program Letter supersedes four documents: the October 1997 Program Letter on Program Integrity, the corresponding Guidance in Applying the Program Integrity Standards, the Certificate of Program Integrity, and the Instructions to the Certification Form. The first goal of this update is to provide more detailed guidance to LSC grant recipients ("recipients") on how they can maintain objective integrity and independence from organizations that engage in restricted activity in compliance with 45 C.F.R. Part 1610 - Use of Non-LSC Funds; Program Integrity. The second goal of this update is to have a single guidance document to inform recipients on how to comply with 45 C.F.R. § 1610.8 (Program Integrity of Recipient) by condensing the four documents listed above into this Program Letter. This Program Letter describes the factors that LSC examines when it conducts a program integrity review and details the best practices that programs can adopt to ensure program integrity. This Program Letter also includes guidance on the Program Integrity annual certification requirement and the updated Certification Form.
Background
LSC regulations require recipients to maintain program integrity by having "objective integrity and independence from any organization that engages in restricted activities." 45 C.F.R. § 1610.8(a). The regulation specifies three prongs, each of which must be met, for LSC to determine that a recipient has objective integrity and independence from such an organization. First, the organization must be legally separate entities. See 45 C.F.R. § 1610.8(a)(1). Second, the other organization may not receive any subgrant(1) of LSC funds from the recipient, and LSC funds may not subsidize restricted activities. See 45 C.F.R. § 1610.8(a)(2). For purposes of Part 1610, a "subsidy" is:
"a payment of LSC funds to support, in whole of in part, a restricted activity conducted by another entity, or payment to another entity to cover overhead, in whole or in part, relating to a restricted activity. A recipient will be considered to be subsidizing the restricted activities of another organization if it provides the use of its LSC-funded resources to the organization without receiving a fair market price for such use."
62 Fed. Reg. 27695, 27698 (May 21, 1997) (Preamble to final rule).
Third, the organizations must be physically and financially separate. Physical and financial separation is characterized by a variety of factors, including by not limited to:
- The existence of separate personnel;
- The existence of separate accounting and timekeeping records;
- The degree of separation from facilities in which restricted activities occur, and the extend of such restricted activities; and
- The extent to which signs and other forms of identification which distinguish the recipient from the organization are present.
45 C.F.R. § 1610.8(a)(3).
The financial separation requirement is separate and distinct from the requirement that LSC funds not be used to subsidize restricted activities. While separate accounting may evidence that no subsidy has occurred, the regulation explicitly states that mere bookkeeping separation is insufficient to meet the physical and financial separation requirements. The recipient and the organization engaged in restricted activities must operate as two separate entities (that may collaborate) and cannot operate as essentially one organization with administrative separation on paper. See External Opinion 2003-1009 (June 24, 2003).
Physical and financial separation is the most nuanced and complex of the three prongs in the regulation. LSC must determine whether physical and financial separation exists on a case-by-case basis by considering the totality of the facts. Factors present in the context of the overall relationship between the entities might be acceptable in one situation and unacceptable in another situation in which other factors weight more heavily against a finding of sufficient separation. Each factor weighs for or against physical or financial separation. It is the total weight of all the factors taken together that LSC uses to determine the degree of the recipient's physical and financial separation from the other organization.
The preamble to the 1997 version of Part 1610 states:
"[D]eterminations taking into account the physical and financial separation standards must ensure that there is no identification of the recipient with restricted activities and that the other organization is not so closely identified with the recipient that there might be confusion or misunderstanding about the recipient's involvement with or endorsement of prohibited activities."
Ultimately in all situations the separation between the organizations must be clear to clients, courts, agencies, and others with whom the recipient comes into contact, including the general public. See External Opinion 2003-1009 (June 24, 2003).
Factors to Consider and Best Practices to Ensure Objective Integrity and Independence
As described above, to determine objective integrity and independence, the regulation specifies three separate prongs, each of which must be met. See 45 C.F.R. § 1610.8(a). Recipients should analyze each of the three prongs separately for compliance, and recipients must comply with all three. The third prong has a variety of factors, and no single factor determines compliance; rather, LSC considers the entire situation (i.e., totality of the facts).
Recipients can achieve program integrity in various ways. Below are some of the factors that LSC examines to determine whether a recipient is in compliance with 45 C.F.R. § 1610.8 and some of the best practices that LSC recommends to ensure compliance with § 1610.8.
1.The other organization is a legally separate entity. To establish legal separation, the recipient should consider the following factors:
a) The recipient and its affiliated organization are legally separate corporations, each with its own articles of incorporation and bylaws, organized in accordance with the laws of the jurisdiction in which they are established;
b) Recipients that have completely overlapping boards with organizations that engage in restricted activities are at increased risk of failing to maintain program integrity and will face challenges in ensuring independence, resolving conflicts of interests, and ensuring board members are fulfilling their duties to the recipient. Grantees should have proper mechanisms in place to ensure members of their governing bodies fully understand their fiduciary duties to the recipient and there should be procedures in place to demonstrate how they effectively carry out these duties to make decisions that are in the best interest of the recipient. These duties vary by state and include, but may not be limited to, the duties of care, confidentiality, loyalty, obedience, and accounting;
c) The recipient can demonstrate it functions independently and separately from the organization engaged in restricted activities (e.g., there are sufficient programmatic and operational boundaries that separate the two entities, and the recipient communicates these boundaries clearly and frequently to board members, officers, and staff);
d) The board has adopted a conflicts of interest policy that addresses potential conflicts that could arise from board members serving on both boards. The policy includes procedures for handling both perceived and actual conflicts;
e) The meetings of each organization’s governing body are held at separate times and the governing bodies maintain separate meeting minutes and meeting records;
f) The recipient has adopted its own separate operations and administrative manuals, including performance management, onboarding, etc., based upon the recipient’s own needs, independently considered from the needs of the other organization;
g) Transactions between the recipient and the organization that engages in restricted activities are conducted at arm’s length and memorialized in writing through contracts, memoranda of understanding, and other written instruments; and
h) The recipient conducts an independent assessment to review any jurisdictional factors that would indicate a risk of piercing the corporate veil for the recipient.
2. The other organization does not receive any subgrant of LSC funds from the recipient, unless otherwise authorized pursuant to 45 C.F.R. Part 1627,(2) and LSC funds do not subsidize restricted activities. To demonstrate that the other organization does not receive a non-PAI subgrant of LSC funds and that LSC funds do not subsidize restricted activities, the recipient should consider the following factors:
a) Employees shared between the recipient and the other organization track their actual time carefully so that LSC funds pay only the portion of the individual’s salary that corresponds to the hours spent working on LSC-eligible activities for the recipient;
b) The recipient avoids the provision of free or below fair market value of goods or services to the other organization; and
c) The recipient does not use LSC funds to pay for or subsidize any of the operational expenses of the organization engaged in restricted activities.
3.The recipient is physically and financially separate from the other organization.
The presence or absence of any one factor below will not be determinative. Factors relevant to this determination shall include but will not be limited to:(3)
a) The existence of separate personnel: To demonstrate the existence of separate personnel, the recipient should consider the following factors:
i. The organizations have separate policies and procedures, employee manuals, and performance review processes;
ii. The extent to which the recipient and the other organization engage in cross management, joint practice groups, co-counseling arrangements and other joint projects with the organization that engages in restricted activities. In doing so, the recipient should examine the duration, frequency, and extent of these activities;
iii. The extent to which both organizations intertwine their day-to-day work, projects, campaigns, and efforts;
iv. Recipient employees have a clear understanding of the organization that employs them and who they report to. Recipient employees do not supervise the legal work of employees of the organization that engages in restricted activity;
v. The extent to which the recipient and the other organization conduct joint staff and administrative meetings. The recipient should examine the duration, frequency, and extent of these meetings when evaluating this factor; and
vi. It is clear t o a reasonable individual or the community that an employee is acting in their capacity as an employee of the recipient versus an employee of the organization that engages in restricted activity.
b) The existence of separate accounting and timekeeping records: To demonstrate the existence of separate accounting and timekeeping records, the recipient should consider the following factors:
i. The organizations have separate accounting systems or, if they use the same system, they have separate software licenses;
ii. The organizations maintain separate financial statements and tax forms;
iii. The recipient has its own Chief Financial Officer (“CFO”). Recipients that share CFOs(4) with organizations that engage in restricted activities are at increased risk of failing to maintain program integrity and will face challenges maintaining fiscal independence, resolving conflicts of interest, and ensuring the CFO is fulfilling their fiduciary duties to the recipient. Where the organizations share a CFO, each organization has a conflict-of-interest policy that reflects the complications that can arise from sharing a CFO and the CFO’s understanding of their legal and fiduciary duties to each organization; and
iv. Any financial dealings and/or sharing of resources between the recipient and the organization that engages in restricted activities is carried out pursuant to arm’s length agreements for fair market value and is memorialized in contracts, memoranda of understanding, and other written instruments. The recipient keeps accounting and timekeeping records sufficient to support the basis for each transaction.
c) The degree of separation from facilities in which restricted activities occur, and the extent of such restricted activities: To demonstrate a sufficient degree of separation from facilities in which restricted activities occur, the recipient should consider the following factors:
i. The restricted work that is being conducted by the other organization and the duration, frequency, and extent of those restricted activities;
ii. The physical addresses and locations where the recipient conducts its business and the extent to which they are integrated with or separate from the physical addresses and locations of the organization that engages in restricted activities;
iii. The extent to which the recipient expects to share equipment and facilities with an organization that engages in restricted activities;
iv. The recipient takes steps to avoid any confusion or misunderstanding among its staff, the general public, and other stakeholders about the recipient’s involvement with or endorsement of prohibited activities; and
v. The extent to which the recipient and the other organization intermingle their business records and work product (e.g., shared systems, shared files, combined reports, combined recordkeeping, etc.).
d)The extent to which signs and other forms of identification that distinguish the recipient from the organization engaged in restricted work are present: To demonstrate sufficiency of signage that distinguishes the recipient from the other organization, the recipient should consider the following factors:
i. The extent to which signs, logos, promotional materials, fundraising campaigns, and other public-facing materials or other forms of identification clearly distinguish the recipient from the organization that engages in restricted activities; and
ii. The extent to which each organization maintains a separate online presence and present themselves to the general public as separate entities (e.g., separate websites, separate social media accounts, separate published reports or separation of information by organization in joint reports, etc.).
e) Other factors the recipient should consider are as follows:
i. The existence of separate benefits packages for the recipient’s employees;
ii. Evidence of confusion or misunderstanding about the recipient’s involvement with or endorsement of prohibited activities;
iii. The degree to which both organizations intermingle their business systems, records, and/or work product (e.g., shared case management system, timekeeping, accounting, or payroll systems and who has access to such systems, shared files, combined reports, combined recordkeeping, etc.);
iv. The existence and degree to which there is overlap in both organizations’ governing bodies; and
v. The existence of programmatic and operational boundaries between the two entities.
We hope that this guidance proves helpful. For any questions regarding this issue, please contact Shila Mashhadishafie, Program Counsel, Office of Compliance and Enforcement, mashhadishafies@lsc.gov.
Certification Guidance
Under § 1610.8, each recipient's governing body is required to certify annually that “the recipient is in compliance with the requirements” of that section as described by this Program Letter.
To enable each governing body to undertake the review required, the program director must provide its governing body with a written report that either:
(a) states that the recipient has not transferred recipient funds to nor subsidizes, employs, shares or utilizes any of the same personnel, office space, facilities or equipment with an organization which engages in restricted activity; or
(b) describes how the recipient maintains objective integrity and independence from an organization that engages in restricted work by using the factors discussed in this Program Letter.
The governing body must review the written report. The president or chair of the recipient’s governing body must sign and date the “Certification of Program Integrity” document found in GrantEase.
Certification of Program Integrity
Annual Reporting as Required By 45 C.F.R. Part 1610
I certify that the governing body has received and reviewed Program Letter 22-3 and a written report from the executive director pertaining to the recipient’s compliance with the program integrity requirements of 45 C.F.R. Part 1610 and authorized me, based on the governing body’s review and discussion of the director’s report, to certify that:
1. The recipient is a legally separate organization from any entity that engages in restricted activity; and
2. Except for funds provided to a bar association, pro bono program, private attorney or law firm, or other organization for the sole purpose of funding private attorney involvement activities (PAI) pursuant to 45 C.F.R. Part 1614, since January 1, 1997, the recipient has not transferred LSC funds to any organization which engages in restricted activity; and
3.During the recipient’s prior fiscal year, the recipient has not used recipient funds or resources to subsidize the restricted activity of any organization; and
4. The recipient meets the requirements of 45 C.F.R. § 1610.8(a) in that the recipient is physically and financially separate from any organization that engages in restricted activity. Factors relevant to the Board’s determination of the program’s objective integrity and independence include, but were not necessarily limited to:
a. The existence of separate personnel;
b. The existence of separate accounting and timekeeping records;
c. The degree of separation from facilities in which restricted activities occur, and the extent of such restricted activities; and
d. The extent to which signs and other forms of identification which distinguish the recipient from the other organization are present.
5 .The existence of other factors relevant to the Board’s determination of the program’s objective integrity and independence as referenced in 45 C.F.R. § 1610.8(a)(3) and Program Letter 22-3 (New Program Integrity Program Letter) were considered.
On behalf of the governing body, I acknowledge that compliance with the integrity and independence requirements of 45 C.F.R. § 1610.8(a) is a prerequisite to the recipient receiving continued funding from the Legal Services Corporation.
(Chair or President of the Board) ___________________________________
(Date) ________________________
__________________________
1 Subgrants of LSC funds for the sole purpose of funding private attorney involvement activities (PAI) pursuant to 45 C.F.R. Part 1614 are permitted under 45 C.F.R. § 1627.5(d)(1) which provides that "[t]he prohibitions and requirements set forth in 45 C.F.R. Part 1610 apply only to the subgranted funds when the subrecipient is a bar association, pro bono program, private attorney or law firm, or other entity that receives a subgrant for the sole purpose of funding" PAI activities.
2 See supra note 1.
3 This third prong takes into consideration the totality of the facts and as such certain factors that are listed under the first two prongs above are relevant to this analysis and will be repeated in this section.
4 In this context, a shared CFO generally refers to an internal employee who serves in that capacity for both organizations and not an employee of a contracted accounting firm hired by both entities.