[Federal Register Volume 62, Number 76 (Monday, April 21, 1997)]
[Rules and Regulations]
[Pages 19424-19427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10039]


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LEGAL SERVICES CORPORATION

45 CFR Part 1640


Application of Federal Law to LSC Recipients

AGENCY: Legal Services Corporation.

ACTION: Final rule.

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SUMMARY: This final rule implements a provision in the Legal Services 
Corporation's (``Corporation'' or ``LSC'') FY 1996 appropriations act 
that is currently incorporated by reference in the Corporation's FY 
1997 appropriations act, which subjects LSC recipients to Federal law 
relating to the proper use of Federal funds. This rule identifies 
applicable Federal law and sets out the mechanism by which recipients 
must agree to be subject to such law and the consequences of a 
violation of the law.

EFFECTIVE DATE: May 21, 1997.

FOR FURTHER INFORMATION CONTACT: Victor M. Fortuno, General Counsel, 
(202) 336-8910.

SUPPLEMENTARY INFORMATION: On May 19, 1996, the Operations and 
Regulations Committee (``Committee'') of the LSC Board of Directors 
(``Board'') requested the LSC staff to prepare an interim rule to 
implement Sec. 504(a)(19) of Public Law 104-134, 110 Stat. 1321(1996), 
the Corporation's FY 1996 appropriations act, which required LSC-funded 
recipients to agree by contract that, with regard to their use of LSC 
funds, they would be subject to Federal law related to the proper use 
of Federal funds. The Committee held hearings on staff proposals on 
July 9 and 19, and the Board adopted an interim rule on July 20 for 
publication in the Federal Register. The interim rule was published on 
August 29, 1996, at 61 FR 45760.
    The Corporation received five timely public comments on the rule 
and held public hearings on December 13, 1996 and January 5, 1997, to 
discuss written comments and hear oral comments. The Committee made 
changes and recommended a final rule to the Board which adopted the 
Committee's recommendation on January 6, 1997 for publication as a 
final rule.
    The Corporation's FY 1997 appropriations act became effective on 
October 1, 1996, see Pub. L. 104-208, 110 Stat. 3009 (1996). It 
incorporated by reference the Sec. 504 condition on LSC grants included 
in the FY 1996 appropriations act implemented by this rule. 
Accordingly, the preamble and text of this rule continue to refer to 
the appropriate section number of the FY 1996 appropriations act.
    Briefly, this rule requires LSC recipients to agree to be subject 
to ``Federal laws relating to the proper use of Federal funds'' in 
their use of LSC funds. This rule puts recipients and their employees 
on notice that LSC funds are Federal funds for the purposes of the 
applicable Federal laws cited in this rule and that a violation of such 
laws would subject the recipient or individual employee to potentially 
serious sanctions.
    A section by section analysis of this final rule is provided below.

Section 1640.1  Purpose

    The purpose of this final rule is to ensure that recipients' LSC 
funds are considered Federal funds for the purposes of Federal law 
relating to the proper use of Federal funds. This rule also identifies 
applicable Federal laws and delineates the consequences to the 
recipient of violations of such law.

[[Page 19425]]

Section 1640.2  Definitions

    The statutory restriction provides that recipients must 
contractually agree to be subject to ``all provisions of Federal law 
relating to the proper use of Federal funds'' with regard to their use 
of LSC funds. The regulation interprets this to mean that, with respect 
to their LSC funds, all programs should be subject to Federal laws 
which address issues of waste, fraud and abuse of Federal funds. The 
legislative history limits the applicable laws to those dealing with 
waste, fraud and abuse and specifically names the laws which apply. The 
House Report for H.R. 2076, an earlier unsuccessful effort to enact a 
provision similar to the provision that was ultimately enacted, states:

    [S]ection 504(2) requires all programs receiving Federal funds 
to comply with Federal statutes and regulations governing waste, 
fraud, and abuse of Federal funds.

H. Rep. No.______, 104th Cong., 1st Sess. 116 (July 1995). See also the 
McCollum/Stenholm bill (H.R. 1806), a recent effort to amend the LSC 
Act, which expressly cites most of the laws included in this part. 
Other laws have been added after consultation with the Corporation's 
Office of the Inspector General, one of whose statutory mandates is to 
prevent the misuse of LSC funds.
    The relevant laws are listed in the definition of ``Federal law 
relating to the proper use of Federal funds'' in paragraph (a)(1) of 
this section. Generally, such laws deal with the bribery of public 
officials or witnesses; the embezzlement or theft of Federal funds; 
attempts to defraud the government; the obstruction of Federal audits; 
and making false statements and claims to the Federal government. One 
exception makes it clear that qui tam actions authorized by section 
3730(b) of Title 31 may not be brought against the Corporation, any 
recipient, subrecipient, grantee, or contractor of the Corporation, or 
any employee thereof.
    Paragraph (a)(2) clarifies that for the purposes of the laws cited 
in paragraph (a)(1), the Corporation shall be considered a Federal 
agency and its funds shall be considered to be Federal funds provided 
by grant or contract.
    Paragraph (b) of this section defines the meaning of a ``violation 
of the agreement.'' A violation of a recipient's agreement to be 
subject to Federal law related to the proper use of Federal funds could 
occur in either of two ways. First, there would be a violation if the 
recipient were convicted of or judgment were entered against it for a 
violation of any of the relevant Federal laws by the Federal court 
having jurisdiction of the matter, and all appeals were final or the 
time to file for an appeal had expired.
    Second, there would be a violation if an employee or board member 
of the recipient were convicted of a violation of the enumerated laws 
and the Corporation found that the offense should be imputed to the 
recipient because the recipient had knowingly or through gross 
negligence allowed the illegal activities to occur.

Section 1640.3  Contractual Agreement

    This section implements the statutory requirement that, as a 
condition of receiving a grant or contract with the Corporation, 
recipients must enter into a contractual agreement that, in regard to 
LSC funds, they will be subject to Federal law relating to the proper 
use of Federal funds. The Federal laws in question normally apply to 
Federal agencies and Federal funds. Because the Corporation is not a 
Federal agency, it was necessary for Congress to provide in 
Sec. 504(a)(19) of the Corporation's FY 1996 appropriations act that, 
for purposes of the application of these laws to recipients, the 
Corporation shall be considered to be a Federal agency and all funds 
provided by the Corporation shall be Federal funds provided by grant or 
contract. This language authorizes the application of Federal law on 
the proper use of Federal funds to the Corporation's recipients.
    This provision also requires that the agreement include a statement 
that the recipient's employees and board members have been informed of 
the applicable Federal laws and the potential consequences to them 
personally and to the recipient if the law is violated. Thus, 
recipients should familiarize their staff and board with the Federal 
laws listed in this part and the significance of the agreement made by 
the recipient. The agreement and Sec. 504(a)(19) mean that, in regard 
to its LSC funds, the recipient, its board members, and its employees 
could be subject to Federal criminal prosecution and civil false claims 
liability for a violation of the Federal statutes listed in this part.
    Recipients should also be mindful of the fact that the 
Corporation's Office of Inspector General (``OIG'') has statutory 
responsibility to investigate the activities covered by the Federal 
laws listed in this part. Although the agreement would apply only to 
LSC funds, recipients are also reminded that the Corporation's OIG 
investigates reports of possible theft or misappropriation of a 
recipient's non-LSC funds as well as its LSC funds.

Section 1640.4  Violation of Agreement

    Paragraph (a) provides that a violation of the agreement as defined 
in this part would render a recipient's grant or contract terminated by 
the Corporation. Section 504(a)(19) clearly evidences Congressional 
intent that a recipient's funding be terminated if there is a violation 
of the applicable Federal law. Because a violation pursuant to 
Sec. 1640.2(b)(1) requires a recipient to have been found by a court of 
law to have violated the applicable Federal law, the Corporation would 
not be obligated to provide a hearing. For a Sec. 1640.2(b)(2) 
violation, on the other hand, prior to any termination, the Corporation 
would be obligated to provide notice and an opportunity to be heard for 
the sole purpose of determining whether a recipient knowingly or 
through gross negligence allowed the illegal activities to occur. Once 
a final decision has been made to impute the violation to the 
recipient, the law requires that the grant or contract be terminated by 
the Corporation.
    Comments on this section questioned whether it provides sufficient 
due process rights when there had been a finding by the appropriate 
court of a violation of applicable Federal law. When a court finds that 
a recipient had violated the law, the rule provides that the 
Corporation will terminate the recipient's grant without a hearing. 
When the appropriate court finds that either a recipient's employee or 
board member has violated the law, a hearing is required prior to 
termination of the recipient's grant only on the issue of whether guilt 
for the violation may be imputed to the recipient because the recipient 
knowingly or through gross negligence allowed the activities that led 
to the violation. Comments requested that the rule clarify that the 
termination proceedings in 45 CFR part 1606 would be provided in such a 
hearing.
    The Board disagreed. Section 504(a)(19) clearly intends that once 
there has been a finding of a violation of the applicable Federal law, 
the Corporation must terminate the grant. Section 504(a) (19) provides 
that a violation of the applicable law ``shall render any grant or 
contractual agreement to provide funding null and void.'' The 
legislative history of this provision provides that ``any violations of 
federal laws shall result in termination of the contract.'' Conf. Rep. 
to H.R. 2076. Unlike other violations of LSC requirements, a violation 
of the applicable Federal law at issue in this rule is determined by a 
court having jurisdiction of the matter. It is not

[[Page 19426]]

determined under the administrative hearing rights required by Section 
1011 of the LSC Act or the Corporation's rule on terminations, 45 CFR 
part 1606. Congress used very strong language in Sec. 504(a)(19) by 
stating that a violation would require that a grant or contract would 
be ``null and void,'' which indicates to the Corporation that the 
provision overrides Section 1011 of the LSC Act. However, because the 
Corporation does not automatically impute guilt for a violation by a 
recipient employee or board member to a recipient, it has determined to 
provide a fair hearing to make a determination whether guilt should be 
imputed to the recipient. However, the Corporation does not intend that 
part 1606 hearing rights would be used in such a situation. 
Accordingly, the use of ``termination hearing'' in this section does 
not refer to a termination hearing under 45 CFR part 1606.
    One comment expressed concern about a clause appearing in 
Secs. 1640.4 (a) and (b), which provides that ``During the pendency of 
any appeal * * * the Corporation may take such steps as it determines 
necessary to safeguard its funds.'' The comment expressed concern that 
the Corporation may take steps that would undercut an appeal by 
prematurely terminating the operations of a recipient through immediate 
action, making funds completely inaccessible to the recipient. The 
comment suggested that the Corporation clarify that the purpose of the 
provision is to safeguard Corporation funds in the possession of the 
recipient without interfering with the capacity of clients to receive 
legal assistance.
    The Corporation cannot anticipate that there would never be a 
situation where it is necessary to act immediately to make LSC funds 
unavailable to a recipient and, thereby, potentially interfere with a 
recipient's capacity to provide ongoing legal assistance activities. 
However, the Corporation is dedicated to ensuring the continued 
provision of legal assistance in each service area and would utilize 
the least intrusive actions necessary while protecting LSC funds and 
ensuring that recipients' appeal rights are not undercut. Under this 
final rule, the Corporation continues to have the authority and 
responsibility to take the steps necessary to safeguard its funds.

Section 1640.5  Deleted

    The interim rule included a Sec. 1640.5 on reporting requirements. 
It required a recipient to give telephonic or other actual notice to 
the Corporation within two (2) working days when the recipient or any 
of its employees or board members have been charged with a violation of 
any of the Federal laws listed in Sec. 1640.2(a). It also clarified 
that ``charged with a violation'' means that an individual or 
governmental entity having authority to initiate such proceedings has 
initiated action against the recipient or its employees or board 
members and the proceeding is pending. It also required the recipient 
to report when the recipient had reason to believe that any of its 
employees or board members have misused LSC funds under this part.
    Comments stated that the 2-day notice requirement in Sec. 1640.5(a) 
was too short and that recipients needed more time to make a rational 
determination that there was an actual reason to believe that there had 
been a misuse of LSC funds in violation of the applicable Federal laws. 
The comments also expressed confusion on the meaning of the standard 
for reporting, which required a recipient to report when it had 
``reason to believe'' that there has been a violation. The Committee 
decided to delete the entire section at the recommendation of the OIG. 
The OIG will rely on the good faith of the grantees and other existing 
means for obtaining notice of the existence of a potential problem.

List of Subjects in 45 CFR Part 1640

    Grant programs; Legal services.

    For reasons set forth in the preamble, 45 CFR Part 1640 is revised 
as follows:

PART 1640--APPLICATION OF FEDERAL LAW TO LSC RECIPIENTS

Sec.
1640.1  Purpose.
1640.2  Definitions.
1640.3  Contractual agreement.
1640.4  Violation of agreement.

    Authority: Sec. 504(a)(19), Pub. L. 104-208, 110 Stat. 3009; 
Pub. L. 104-134, 110 Stat. 1321.


Sec. 1640.1  Purpose.

    The purpose of this part is to ensure that recipients use their LSC 
funds in accordance with Federal law related to the proper use of 
Federal funds. This part also identifies the Federal laws which apply, 
and it provides notice of the consequences to a recipient of a 
violation of such Federal laws by a recipient, its employees or board 
members.


Sec. 1640.2  Definitions.

    (a)(1) Federal law relating to the proper use of Federal funds 
means:
    (i) 18 U.S.C. 201(Bribery of Public Officials and Witnesses);
    (ii) 18 U.S.C. 286 (Conspiracy to Defraud the Government With 
Respect to Claims);
    (iii) 18 U.S.C. 287 (False, Fictitious or Fraudulent Claims);
    (iv) 18 U.S.C. 371 (Conspiracy to Commit Offense or Defraud the 
United States);
    (v) 18 U.S.C. 641 (Public Money, Property or Records);
    (vi) 18 U.S.C. 1001 (Statements or Entries Generally);
    (vii) 18 U.S.C. 1002 (Possession of False Papers to Defraud the 
United States);
    (viii) 18 U.S.C. 1516 (Obstruction of Federal Audit);
    (ix) 31 U.S.C. 3729 (False Claims);
    (x) 31 U.S.C. 3730 (Civil Actions for False Claims), except that 
actions that are authorized by 31 U.S.C. 3730(b) to be brought by 
persons may not be brought against the Corporation, any recipient, 
subrecipient, grantee, or contractor of the Corporation, or any 
employee thereof;
    (xi) 31 U.S.C. 3731 (False Claims Procedure);
    (xii) 31 U.S.C. 3732 (False Claims Jurisdiction); and
    (xiii) 31 U.S.C. 3733 (Civil Investigative Demands).
    (2) For the purposes of the laws listed in paragraph (a)(1) of this 
section, LSC shall be considered a Federal agency and a recipient's LSC 
funds shall be considered to be Federal funds provided by grant or 
contract.
    (b) A violation of the agreement means:
    (1) That the recipient has been convicted of, or judgment has been 
entered against the recipient for, a violation of any of the laws 
listed in paragraph (a)(1) of this section, with respect to its LSC 
grant or contract, by the court having jurisdiction of the matter, and 
any appeals of the conviction or judgment have been exhausted or the 
time for the appeal has expired; or
    (2) An employee or board member of the recipient has been convicted 
of, or judgment has been entered against the employee or board member 
for, a violation of any of the laws listed in paragraph (a)(1) of this 
section with respect to a recipient's grant or contract with LSC by the 
court having jurisdiction of the matter, and any appeals of the 
conviction or judgment have been exhausted or the time for appeal has 
expired, and the Corporation finds that the recipient has knowingly or 
through gross negligence allowed the employee or board member to engage 
in such activities.

[[Page 19427]]

Sec. 1640.3  Contractual agreement.

    As a condition of receiving LSC funds, a recipient must enter into 
a written contractual agreement with the Corporation that, with respect 
to its LSC funds, it will be subject to the Federal laws listed in 
Sec. 1640.2(a)(1). The agreement shall include a statement that all of 
the recipient's employees and board members have been informed of such 
Federal law and of the consequences of a violation of such law, both to 
the recipient and to themselves as individuals.


Sec. 1640.4  Violation of agreement.

    (a) A violation of the agreement under Sec. 1640.2(b)(1) shall 
result in the recipient's LSC grant or contract being terminated by the 
Corporation without need for a termination hearing. During the pendency 
of any appeal of a conviction or judgment, the Corporation may take 
such steps as it determines necessary to safeguard its funds.
    (b) A violation of the agreement under Sec. 1640.2(b)(2) shall 
result in the recipient's LSC grant or contract being terminated by the 
Corporation. Prior to such termination, the Corporation shall provide 
notice and an opportunity to be heard for the sole purpose of 
determining whether the recipient knowingly or through gross negligence 
allowed the employee or board member to engage in the activities which 
led to the conviction or judgment. During the pendency of any appeal of 
a conviction or judgment or during the pendency of a hearing, the 
Corporation may take such steps as it determines necessary to safeguard 
its funds.

    Dated: April 14, 1997.
Victor M. Fortuno,
General Counsel.
[FR Doc. 97-10039 Filed 4-18-97; 8:45 am]
BILLING CODE 7050-01-P