#  **It's The Law**

##  Office of the Assistant General Counsel for Finance and Litigation

**Federal Assistance Law Division**

Vol 11 July 1998

**CONFLICTS OF INTEREST**

**Evaluation and Selection**

**Peer Review Panels**

**Recipient Employees**

**Subaward Activities**

by Percy Robinson

### 

### Overview

A Federal agency has an obligation to avoid making any grant awards
which are tainted by the existence of a conflict of interest.[^1] A
conflict of interest exists when a person participates in a matter which
is likely to have a direct and predictable effect on his or her personal
and financial interests. A conflict is also present when, because of
other activities, relationships, or associations with individuals, there
is an appearance that a person's objectivity in performing his
responsibilities is impaired or that a person is unable or potentially
unable to render impartial assistance or advice. In certain
circumstances, the interests of family members and others are imputed to
the person who is participating in a matter or performing the
responsibilities. There is a potential for conflicts of interest to
arise at every stage of the financial assistance awards and subawards.
Conflicts may occur as program officials carry out their
responsibilities during the evaluation and selection process, during the
review panel process, and as recipients perform their requirements under
an award. Thus, it is important for all individuals involved in the
financial assistance process (program officials, reviewers and
recipients) to be aware of the potential for conflicts as well as their
responsibilities when conflicts are present. It is the intent of this
article to highlight areas where conflicts of interest cold arise, and
to identify some typical conflict situations. It is hoped that
heightened awareness of the potential for conflicts by those involved in
the process will decrease the actual occurrence of unresolved conflicts.

### A. Agency Evaluation and Selection

In most competitive financial assistance programs, a variety of program
officials participate in the evaluation and selection process. Federal
officials participating in the process must ensure that they are free
from conflicts. Under a criminal conflicts of interest statute,[^2] and
Government-wide Standards of Conduct,[^3] a Federal employee may not
participate in his or her official capacity in a matter which is likely
to have a direct and predictable effect on his or her financial
interests.

A particular matter will have a direct and predictable effect on a
financial interest if there is a causal link between any decision or
action to be taken in the matter and any expected effect of the matter
on the financial interest.[^4] Under these restrictions, the financial
interests of the following are imputed to the employee: 1) the
employee's spouse; 2) the employee's minor child or general partner; 3)
an organization or entity which the employee serves as officer,
director, trustee, general partner or employee; and 4) a person with
whom the employee is negotiating or has an arrangement concerning
prospective employment.[^5] This means than an employee may not
participate in the evaluation or review of a financial assistance
application where there may be a direct and predictable effect on their
financial interests or the financial interests of a spouse, minor child,
general partner, nonfederal employer or prospective employer.

An employee also may not participate in the review of an award if he
knows that a person with whom he has a covered relationship is or
represents a party in the award, where it is determined that the
circumstances would cause a reasonable person with knowledge of the
relevant facts to question his impartiality in the matter.[^6] An
employee has a covered relationship with (i) someone with whom the
employee has or seeks a business relationship; (ii) a household member
or close relative; (iii) a person for whom the employee's spouse, parent
or dependent child is serving, or seeking to serve, as an officer,
director, trustee, general partner, attorney, consultant, contractor or
employee; (iv) any person for whom the employee has, within the last
year, served as an officer, director, trustee, general partner, agent,
attorney, consultant, contractor or employee; or (v) an organization in
which the employee is an active participant.[^7]

Essentially, employees may not review applications or participate in the
evaluation or selection process in any circumstances where their
participation in the review process would create the appearance that
they are: 1) giving preferential treatment to any person; 2) losing
complete independence and impartiality; 3) making a government decision
outside official channels; or 4) affecting adversely the confidence of
the public in the integrity of the Government.[^8] Thus, it is important
that employees participating in the financial assistance award
evaluation process receive appropriate training and guidance on conflict
of interest matters. Situations which present an actual conflict or the
appearance of a conflict should be brought to the immediate attention of
supervisors for resolution, which could consist of disqualification,
divestiture, waiver, or other appropriate measures.

Illustration

*An employee serves without compensation on the board of directors of a
nonprofit child care organization. The employee must disqualify himself
from participating in the review of a grant application submitted by
the* *organization, even though his personal financial interests will
not be affected. Award or denial of the grant will affect the financial
interests of the nonprofit organization, and its financial interest are
imputed to the employee as a member of the board of directors.*

### B. Review Panel Process

Use of review panels is a common practice among Federal financial
assistance programs. For example, Department of Commerce Department
Administrative Order (DAO) 203-26 requires that each application for
financial assistance receive an independent, objective review by one or
more review panels qualified to evaluate the applications. The DAO
provides that there must be at least three persons on the review panel,
and that the panel may include one or more persons who are not employees
of the Federal Government.[^9]

Unlike in the case of Federal employees there are no Federal statutes or
regulations which directly address conflict of interest by review panel
members who are not Federal employees. However, in order to ensure the
integrity of the review and evaluation process, it is essential that
review panels conduct their reviews without either the appearance or the
actuality of a conflict of interest.

As a practical matter, the standards used to determine the existence of
a conflict by Federal employees are useful in determining whether a
review panel member has a conflict of interest. A conflict may be
determined to be present when the reviewer has either a financial
interest or an organization conflict of interest with an application
that is under review. A financial interest would include such things as
stock ownership, partnership, trustee relationship, employment,
potential employment or a business relationship with an applicant. It is
important to note that such interests held by a reviewer's spouse,
parent, minor child or business partner are imputed to the reviewed. An
organization conflict of interest would exist where, because of other
activities or relationships with other persons, a person is unable or
potentially unable to render impartial assistance or advice to the
government.[^10]

The significance of identifying a potential conflict of interest on the
part of reviewers should not be underestimated. The Comptroller General
generally does not consider protests of an agency's financial assistance
activities, but may conduct a review if there is a showing that a
conflict or the appearance of a conflict of interest exists.[^11] For
example, the Comptroller General has held that the composition of peer
review panels is a matter within the discretion of the agency which will
not be subject to review absent a showing of possible abuse of
discretion in light of a conflict of interest or bias by a panel
member.[^12] If a conflict of interest by a review panel member is
alleged, review is usually limited to determining whether the
individuals involved improperly exerted prejudice or bias on behalf of
one of the applicants.[^13] A determination that an agency ignored or
failed to resolve an actual conflict of interest or bias on the part of
a reviewer may result in a finding that the agency abused its
discretion. Thus, it is in the interest of the Agency to uncover and
resolve potential conflicts, and otherwise take measures intended to
prevent the improper exercise of bias or prejudice by review panel
members.

In order to discover the existence of a conflict of interest, program
officials should provide reviewers with a checklist or certification
form which sets forth the standards for determining the existence of
conflicts, and requires the reviewer to notify the program official of
any potential or actual conflicts with applications. This document
should be provided to reviewers as early in the review process as
possible so that any potential conflict situations can be identified and
resolved.[^14]

Illustration

The spouse of a review panel member owns a significant amount of stock
in a company that is proposed as a major subcontractor in a grant
application. The spouse's financial interest in the subcontractor
constitutes a financial interest in the application. The financial
interests of the spouse would be imputed to the reviewer, and thus
create a conflict of interest. The review panel member should advise the
appropriate program official of this conflict of interest.

**C. Recipient Employee Standards of Conduct**.

Financial assistance recipients are required to certify, through the
execution of SF-424B, "Assurances -- Non-Construction Programs,"
Paragraph 3, that they will establish safeguards to prohibit employees
from using their positions for a purpose that constitutes or presents
the appearance of personal or organizational conflict of interest, or
personal gain.[^15] The underlying policy for this assurance is to avoid
any conflict of interest, or the appearance of a conflict of interest
that might arise between a recipient's personal financial or other
interests and their duties and responsibilities under a financial
assistance award. Although the general language of the assurance does
not provide much guidance, the intent is to require recipients to
establish policies and procedures requiring employees to provide notice
of conflicts and for the recipient to take appropriate measures to
address any conflicts.

When a violation of Paragraph 3 of Standard Form 424B occurs, it is
possible that related costs may be disallowed. For example, although a
particular agreement might not expressly state that costs incurred in
violation of Paragraph 3 of SF 424B are unallowable, costs must be
reasonable and allocable to the award in order to be allowable.[^16] In
determining reasonableness, consideration must be given to the
restraints imposed by the terms and conditions of the financial
agreement.[^17] In addition, costs must conform to any limitations or
exclusions set forth in the applicable cost principles or in the award
as to types or amount of cost items.[^18] Costs incurred in violation of
the conflict of interest limitations contained in Paragraph 3 of SF-424B
may be determined to be neither reasonable nor in conformance with the
applicable cost limitations, and, hence, unallowable under the
principles of Circular A-122.

Illustration

An organization receives financial assistance to operate a management
and technical assistance center. Under the terms of the financial
assistance agreement, services are to be provided on a fee-for-service
basis and the recipient is required to assist a certain minimum number
of clients. During the course of the award, the recipient provides
assistance to several companies in which the recipient's project
director has a financial interest. This situation constitutes a conflict
of interest. Substantial questions could be raised as to whether there
was favoritism towards the companies in which the project director had a
financial interest, and whether those companies had a legitimate need
for the management and technical assistance that was provided.

D. Procurements and Subgrants under Grants

OMB Circular A-110 and 15 C.F.R. Part 24 mandate several procurement
standards intended to prevent financial assistance recipients from
becoming involved in procurement-related conflicts of interest. Both
require a financial assistance recipient to maintain written standards
of conduct governing the performance of employees engaged in the award
and administration of contracts.[^19] These standards prohibit
employees, officers, and agents from participating in the selection,
award or administration of a contract supported by Federal funds if a
real or apparent conflict of interest would be involved.[^20] The
purpose of requiring the establishment of standards of conduct for
grantees' procurements is to ensure the integrity of all of the
processes which result in the selection, award and administration of
Federal funds. A conflict may be determined to be present if the
employee, officer, agent or any member of his immediate family, partner
or any organization that employs or is about to employ prohibited
categories of persons, has a financial or other interest in the company
selected for an award. In addition, officers, employees and agents of
the recipient are prohibited from soliciting or accepting gratuities,
favors or anything of monetary value from contractors or parties to
subagreements, with exceptions possible for situations in which the
financial interest is not significant or the gift is an unsolicited item
of nominal value. The standards of conduct are required to provide for
disciplinary action to be applied for violations of the standards by
officers, employees or agents of the recipient.[^21] These prohibitions
are also equally applicable to subgrants under financial assistance
awards.[^22]

Illustration

A Federal Grant recipient's employee assists the grantee in the
development of specifications for a subcontract to be awarded under the
grant. A company which employs a partner of the employee on a part-time
basis then submits a bid to perform the work required by the
subcontract. A conflict of interest is present because the financial and
other interests of the employee's partner are imputed to the employee,
and the employee has participated in the recipient's subcontract
selection process.

### Conclusion

The early identification and resolution of conflicts of interest is
important for several reasons.

-   From the perspective of the awarding agency it is important that
    even the appearance of conflict of interest be avoided to preserve
    legitimate agency discretion in the financial assistance review and
    selection process. The Comptroller General generally does not
    consider protests concerning the award of cooperative agreements,
    unless there is either some showing that the agency is using a
    cooperative agreement where a contract is required, or that a
    conflict of interest exists. Consequently, if a substantial showing
    of an unresolved conflict of interest is made, the Comptroller
    General may undertake a review of an agency's financial assistance
    activities that are typically not subject to such review.

-   From the perspective of the individual Federal officials involved in
    the financial assistance review process, awareness of potential
    conflicts will help prevent employees from running afoul of the
    prohibitions contained in the Standards of Conduct and 18 USC §208.

-   From the perspective of financial assistance award recipients, the
    importance of avoiding conflicts of interest is clear. Violation of
    the conflict of interest require-ments can result in disallowed
    costs or even the suspension or termination of an award, if it is
    determined that the applicable cost principles or the terms and
    conditions of an award have been violated.

Undiscovered or unresolved conflicts have the potential to undermine the
integrity of the financial assistance process. All individuals involved
in the financial assistance process have a responsibility to be aware of
the potential for conflict of interest issues. Program officials must
not only be cognizant of their own potential for conflicts, but should
also ensure that review panel members and recipients are aware of and
adhere to the applicable conflict of interest requirements. When actual
or potential conflicts are identified they must be brought to the
attention of the appropriate program officials for resolution. Officials
responsible for handling financial assistance conflict of interest
issues may obtain advice from the Financial Assistance Law Division at
(202) 482-8035.

Attachment

Attachment

CONFLICT OF INTEREST/CONFIDENTIALITY CERTIFICATION FOR

NON-GOVERNMENTAL PEER REVIEWERS

### Confidentiality of Documents and Restriction on Contact

I agree that applications for \_\_\_\_\_ awards are made available to
reviewers solely for the purpose of reviewing those applications against
the criteria of the financial assistance program.

I also agree not to discuss the content of the applications outside the
Department during or after the review process, and to discuss the
proposals within the Department only with the other reviewers and
Department staff members and in the context of, and under the procedures
for, application review. I agree to follow the written instructions
provided by the Department for the completion of review forms. I also
agree to retain no copies of documents or parts of documents related to
this review.

I agree not to contact the originators of applications being reviewed
concerning any aspect of their contents. I also agree not to use any
information obtained as a result of my participation as a panel member
for personal or private gain.

### Conflict of Interest

I hereby certify that, to the best of my knowledge, I do not have a
conflict of interest and that my particular circumstances are not likely
to raise the appearance of a conflict of interest or impropriety with
respect to any applications I am asked to review or comment on.

For purposes of this agreement, I understand that a financial interest
may include employment, stock ownership, a creditor or debtor
relationship, or prospective employment with an applicant. I also
recognize that I will be considered to have a financial or other
interest, and therefore a conflict of interest, if any of the following
has a financial or other interest in a financial assistance application
I am asked to review or comment on:

(1) I, my spouse, minor child, or general partner;

(2) A profit or non-profit organization in which I serve as an officer,
    director, trustee, general partner, or employee; or

(3) Any person or organization with which I am negotiating or have an
    arrangement concerning employment, including consultantship, or a
    past employer (within the last year).

I recognize that this certification is a continuing representation. I
acknowledge that it is in effect at all times until I have completed all
of the work performed by me under this agreement.

If I discover that I might have a conflict of interest, or might present
a conflict of interest, with any application within the completion, I
will immediately inform the appropriate program official and refrain
from further work as a reviewer until authorized to continue.

### Application of Freedom of Information Act and Privacy Act

I understand under the Freedom of Information Act (FOIA) and the Privacy
Act the Department may be required to release my reviews verbatim to the
public. However, I understand that the Department will attempt to
protect this information from disclosure to the extent permitted by the
FOIA and the Privacy Act. I also understand that a list of those serving
as reviewers may be released upon appropriate request. I understand
further that a summary of all comments, including mine, may be provided
to applicants upon request and that such a summary will not be
attributed to any reviewer by name.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Name (print)

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

signature date

[^1]: *Burgos & Associates, Inc.,* 59 Comp. Gen. 273 (1980).

[^2]: 18 U.S.C. §208.

[^3]: 5 C.F.R. §2635.

[^4]: 5 C.F.R. §2635.402(b) (1).

[^5]: 18 U.S.C. §208(a).

[^6]: 5 C.F.R. §2635.502(a).

[^7]: 5 C.F.R. §2635.502(b) (1).

[^8]: 5 C.F.R. §2635.101.

[^9]: Department Administrative Order 203-26, §4.02h(1) ( c), (d).

[^10]: *J&E Associates, Inc*., Comp. Gen. Dec. B-278771 (March 12,
    1998).

[^11]: *Burgos & Associates, Inc*. 59 Comp. Gen. 273 (1980); *Management
    Development Group*, 64 Comp. Gen. 669 (1985).

[^12]: *University Research Corporation*, Comp. Gen. Dec. B-253725.4
    (October 26, 1993). It should be noted that although some of the
    cited Comptroller General decisions are procurement-related, the
    general principles regarding conflicts of interest are equally
    applicable in the financial assistance arena.

[^13]: *Southwest Regional Laboratory*, Comp. Gen. Dec. B-219985
    (December 16, 1985); *Harry Kahn Associates*, Comp. Gen. Dec.
    B-216306.2 (June 28, 1985); *DRI/McGraw Hill*, Comp. Gen. Dec.
    261181 (August 21, 1995).

[^14]: A sample Conflict of Interest Statement for Panel Reviewers is
    included as an attachment.

[^15]: Standard Form SF-424B "Assurances -- Non-Construction Programs,"
    Paragraph 3. Standard Form 424D "Assurances -- Construction
    Programs," Paragraph 7, contains an identical requirement.

[^16]: Office of Management and Budget Circular A-122, Attachment A,
    Paragraph A.2.a.

[^17]: Office of Management and Budget Circular A-122, Attachment A,
    Paragraph A.3.b.

[^18]: *Id*. At Paragraph A.2.b.

[^19]: Office of Mangaement and Budget Circular A-110, Subpart C
    Paragraph 42; 24 C.F.R. 24 §36(b) (3).

[^20]: *Id.*

[^21]: *Id.*

[^22]: Office of Management and Budget Circular A-110, Subpart A,
    Section 5; 15 CFR §24.37.