**Billing Code: 6116-01-M**

**U. S. AGENCY FOR INTERNATIONAL DEVELOPMENT**

**22 CFR Parts 202, 205, 211, and 226**

**RIN [0412-AA52]{.underline}**

**Participation by Religious Organizations in USAID Programs**

**AGENCY:** Agency for International Development (USAID)

**ACTION:** Final rule.

**SUMMARY:** This final rule implements Executive Branch policy that,
within the framework of constitutional guidelines, religious (or
"faith-based") organizations should be able to compete on an equal
footing with other organizations for USAID funding. This final rule
revises USAID regulations pertaining to grants, cooperative agreements
and contracts awarded for the purpose of administering grant programs to
ensure their compliance with this policy and to clarify that faith-based
organizations are eligible to participate in programs on the same basis
as any other organization, with respect to programs for which such other
organizations are eligible.

**EFFECTIVE DATE:** October 19, 2004.

**FOR FURTHER INFORMATION CONTACT:** Linda Shovlain, Acting Director,
Center for Faith-Based and Community Initiatives, USAID, Rm. 3.9.031,
1300 Pennsylvania Ave., NW., Washington, DC 20523; telephone: (202)
712-4080 (this is not a toll-free number).

**SUPPLEMENTARY INFORMATION:**

On June 7, 2004, the Agency for International Development published in
the Federal Register (69 FR 31773) notice of a proposed rule to
implement, in part, Executive Order 13280, published in the Federal
Register on December 16, 2002 (67 FR 77145), and Executive Order 13279,
published in the Federal Register on December 16, 2002 (67 FR 77141). As
more fully explained below, these orders, among other things, directed
the Agency for International Development to end discriminatory treatment
of religious or "faith-based" organizations in the administration of
Agency grants and programs. The Agency provided a 60-day comment period
on the proposed rule, which ended on August 6, 2004. The Agency also
offered the public the opportunity to submit comments by surface mail,
e-mail or fax.

**I. Background**

Religious (or "faith-based") organizations make an important
contribution to the delivery of humanitarian and economic assistance in
much of the world. Faith-based organizations acting alone or in
partnership with local and national governments, community-based
organizations, institutions of higher education, and other private
organizations do much good work to meet the pressing needs of countries
and their citizens, consistent with the objectives of the U.S. foreign
assistance program.

Faith-based non-profit organizations have been implementing humanitarian
and development activities for USAID for decades. Nevertheless, this
final rule seeks to further facilitate the contribution of faith-based
and community organizations to increase the reach and effectiveness of
its programs. We believe this rule will strengthen USAID's overall
efforts, given priority in the national security strategy of the United
States, to respond to the humanitarian and economic development needs of
countries world-wide.

President Bush has directed Federal agencies, including USAID, to take
steps to ensure that Federal policy and programs are fully open to
faith-based and community groups in a manner that is consistent with the
Constitution. The Administration believes that such groups possess an
under-appreciated ability to meet the needs of disadvantaged people
overseas struggling to make a better life, recover from a disaster or
live in a free and democratic country. The Administration believes that
there should be an equal opportunity for all organizations \-- both
religious and nonreligious \-- to participate as partners in Federal
programs.

As part of these efforts, President Bush issued Executive Order 13198 on
January 29, 2001. The Order, which was published in the Federal Register
on January 31, 2001 (66 FR 8499), created Centers for Faith-Based and
Community Initiatives in five Cabinet departments \-- Housing and Urban
Development, Health and Human Services, Education, Labor, and Justice.
The Executive Order charged the Centers to identify

and eliminate regulatory, contracting, and other programmatic obstacles
to the participation of faith-based and community organizations in the
provision of social services by their Departments. On December 12, 2002,
President Bush issued Executive Order 13280. That Order, published in
the Federal Register on December 16, 2002 (67 FR 77145), created Centers
in two additional agencies \-- the United States Agency for
International Development and the Department of Agriculture \-- and
charged those Centers with duties similar to those set forth in
Executive Order 13198. On December 12, 2002, President Bush also issued
Executive Order 13279, published in the Federal Register on December 16,
2002 (67 FR 77141). That Executive Order charges Executive Branch
agencies to ensure equal protection of laws for faith-based and
community groups that apply for funds to meet and administer social
service programs domestically and abroad. President Bush called for an
end to discrimination against faith-based organizations. He further
directed that faith-based organizations be allowed to retain their
religious autonomy over, among other things, their internal governance
and composition of boards and over their display of religious art,
icons, scriptures, or other religious symbols when participating in
government-funded programs. President Bush directed each Executive
Branch agency, including USAID, to implement these policies, in a manner
consistent with the First Amendment to the United States Constitution.
This rule fulfills in part USAID\'s responsibilities under these
Executive Orders. The rule is similar to rules adopted by other
Executive Branch agencies charged with implementing the Faith-Based and
Community Initiative Executive Orders described above.

**II. This Rule**

A. [Purpose of Rule]{.underline}

Consistent with the President\'s Initiative, this rule revises USAID\'s
regulations to ensure that there are no unwarranted barriers to the
equal participation of faith-based organizations in USAID\'s programs.
The objective of the rule is to ensure that USAID\'s programs are open
to all qualified organizations, regardless of their religious character,
and to establish clearly the proper uses to which funds may be put and
the conditions for receipt of funding. In addition, this rule is
designed to ensure that the implementation of USAID\'s programs is
conducted in a manner consistent with the requirements of the

Constitution.

B. [USAID Regulations Amended by Rule]{.underline}

This rule revises in its entirety 22 CFR part 205, Payments to and on
Behalf of Participants in Nonmilitary Economic Development Training
Programs. The new title is "Participation by Religious Organizations in
USAID Programs." This rule also amends the following USAID regulations:

1.  22 CFR part 202, Overseas Shipment of Supplies by Voluntary
    Non-Profit Relief Agencies.

2.  22 CFR part 211, Transfer of Commodities for Food Use in Disaster
    Relief, Economic Development, and Other Assistance.

3.  22 CFR part 226, Administration of Assistance Awards to U.S.
    Non-Government Organizations.

C. [Regulatory Amendments to Title 22]{.underline}

The revised part 205 applies to all Federal financial assistance
(including grants, cooperative agreements and contracts that administer
grant programs) awarded by USAID. Award documentation for such Federal
financial assistance will include standard clauses that incorporate the
requirements of part 205, and USAID internal directives will highlight,
explain, and incorporate part 205 by reference. The rule also makes
corresponding changes to existing parts 202, 211 and 226 of 22 CFR that
relate to aspects of Federal financial assistance programs administered
by USAID.

1\. [Participation by religious organizations in USAID
programs.]{.underline} The rule makes clear that organizations are
eligible to participate in USAID programs without regard to their
religious character or affiliation, and that organizations may not be
excluded from the competition for USAID assistance awards or sub-awards
simply because they are religious. Specifically, religious organizations
are eligible to compete for funding on the same basis, and under the
same eligibility requirements, as all other nonprofit organizations. The
Federal government and intermediary organizations administering USAID
funds are prohibited from discriminating for or against organizations on
the basis of religious character or affiliation. Nothing in this rule,
however, precludes those administering USAID funded programs from
accommodating religious organizations in a manner consistent with the
Religion Clauses of the First Amendment to the Constitution, as they
have been interpreted to apply in the domestic context.

2\. [Inherently religious activities]{.underline}. The rule describes
the requirements applicable to all recipient and sub-recipient
organizations regarding the use of USAID funds for inherently religious
activities. Specifically, a participating organization may not use
direct financial assistance[^1] from USAID to support inherently
religious activities, such as worship, religious instruction, or
proselytization. If the organization engages in such activities, the
activities must be offered separately, in time or location, from the
programs or services funded with direct USAID assistance, and
participation must be voluntary for the beneficiaries of the
USAID-funded programs or services. This requirement ensures that direct
financial assistance from USAID to religious organizations is not used
to support inherently religious activities. Such assistance may not be
used, for example, to conduct worship services, prayer meetings or any
other activity that is inherently religious.

This restriction does not mean that an organization that receives USAID
funds cannot engage in inherently religious activities. It simply means
that such an organization cannot fund these activities with direct
financial assistance from USAID. Thus, faith-based organizations that
receive direct financial assistance from USAID must take steps to
separate, in time or location, their inherently religious activities
from the direct USAID-funded services that they offer.

In addition, the rule clarifies that the legal restrictions applicable
to religious programs within correctional facilities will sometimes be
different from the legal restrictions that apply to other USAID
programs, on account of the fact that the degree of government control
over correctional environments sometimes warrants affirmative steps by
prison officials, in the form of chaplaincies and similar programs, to
ensure that prisoners have access to opportunities to exercise their
religion in the prison.

3\. [Independence of religious organizations]{.underline}. The rule
clarifies that a religious organization that participates in USAID
programs will retain its independence and may continue to carry out its
mission, including the definition, practice, and expression of its
religious beliefs, provided that it does not use direct financial
assistance from USAID to support any inherently religious activities,
such as worship, religious instruction, or proselytization. Among other
things, a faith-based organization may use space in its facilities to
provide USAID-funded services without removing religious art, icons,
scriptures, or other religious symbols. In addition, a USAID-funded
religious organization may retain religious terms in its organization\'s
name, select its board members and otherwise govern itself on a
religious basis, and include religious references in its organization\'s
mission statements and other governing documents.

4\. [Use of USAID funds for acquisition, construction, or rehabilitation
of structures]{.underline}. The rule clarifies that USAID funds may be
used for the acquisition, construction, or rehabilitation of structures
only to the extent that those structures are used for conducting
eligible activities under the specific USAID program. Where a structure
is used for both eligible and inherently religious activities, the rule
clarifies that USAID funds may not exceed the cost of those portions of
the acquisition, construction, or rehabilitation that are attributable
to eligible activities. Additionally, USAID funds may not be used for
acquisition, construction, or rehabilitation of sanctuaries, chapels, or
any other room that a religious congregation that is a recipient or
sub-recipient of USAID assistance uses as its principal place of
worship.

5\. [Nondiscrimination in providing assistance]{.underline}. The rule
clarifies that USAID and any organization that receives direct financial
assistance from USAID shall not, in providing program assistance,
discriminate for or against a program beneficiary or potential program
beneficiary on the basis of religion or religious belief. Accordingly,
religious organizations, in providing services directly funded in whole
or in part by USAID, may not discriminate for or against current or
prospective program beneficiaries on the basis of religion or religious
belief.

6\. [Assurance requirements]{.underline}. This rule directs the removal
of those provisions of USAID\'s agreements, covenants, memoranda of
understanding, policies, or regulations that require only USAID-funded
religious organizations to provide assurances that they will not use
monies or property for inherently religious activities. All
organizations that participate in USAID programs, including religious
ones, must carry out eligible activities in accordance with all program
requirements and other applicable requirements governing the conduct of
USAID-funded activities, including those prohibiting the use of direct
financial assistance from USAID to engage in inherently religious
activities. In addition, to the extent that provisions of USAID\'s
agreements, covenants, policies, or regulations disqualify religious
organizations from participating in USAID\'s programs because they are
motivated or influenced by religious faith to provide social services,
or because of their religious character or affiliation, the rule removes
that restriction, which is not required by governing law.

7\. [National Security/Foreign Policy Waiver]{.underline}. The rule also
permits the Secretary of State to waive all or any part of the rule, on
a case-by-case basis, where the Secretary determines that such waiver is
necessary to further the national security or foreign policy interests
of the United States.

**III. Response to Comments Received on the Proposed Rule**

The Agency received comments from a small number of individuals and
non-governmental organizations, including national religious
organizations, some of whom indicated a special interest in church/state
issues. Most of the comments opposed allowing faith-based organizations
to compete for government funds and/or believed greater restrictions
should be placed on their receipt of funds. In contrast, one comment
recommended that the restrictions on inherently religious activities be
removed, in order to permit more effective assistance to religious
organizations that provide social welfare services.

The following is a summary of comments by issue, and the Agency's
responses to those comments.

*Participation of Religious Organizations in Government-Funded Programs*

[Comment]{.underline}: Several commenters questioned whether the rule
violates the Establishment Clause of the First Amendment to the U.S.
Constitution. One commenter declared that the rule "anticipates the
implementation of a patently unconstitutional grant of government money
to pervasively sectarian institutions." Commenters were concerned with
the potential promotion by government of particular religious groups or
of religion in general; the likelihood that religious organizations
would conform their religious practices and activities to the rule's
requirements; and the general prospect of government entanglement with
religion.

[USAID Response:]{.underline} We disagree with the commenters. The
regulations ensure that there is no direct USAID funding for inherently
religious activities, consistent with current precedent involving
domestic programs.[^2] Specifically, organizations receiving direct
USAID funds must ensure that inherently religious activities are
separate in time or location from USAID-funded services, and they must
also ensure that participation in such religious activities is
voluntary. Furthermore, in programs supported by direct USAID funds,
organizations are prohibited from discriminating for or against a
program beneficiary on the basis of religion or religious belief.

In addition, the Supreme Court\'s "pervasively sectarian" doctrine \--
which held in the domestic context that there are certain religious
institutions in which religion is so pervasive that no government aid
may be provided to them, because their performance of even "secular"
tasks will be infused with religious purpose \-- no longer enjoys the
support of a majority of the Court. Four Justices expressly abandoned it
in *Mitchell v. Helms*, 530 U.S. 793, 825-829 (2000) (plurality
opinion), and Justice O\'Connor\'s opinion in that case set forth
reasoning that is inconsistent with its underlying premises, see id. at
857-858 (O\'Connor, J., concurring in judgment, joined by Breyer, J.)
(requiring proof of "actual diversion of public support to religious
uses"). Thus, six members of the Court have rejected the view that aid
provided to religious institutions will invariably advance the
institutions\' religious purposes, and that view is the foundation of
the "pervasively sectarian" doctrine. We therefore believe that USAID
may fund all service providers, without regard to religion and free of
criteria that require the provider to abandon its religious expression
or character, in accordance with this rule.

The rule does not endorse religion in general or any particular
religious view. In fact, the rule specifically prohibits discrimination
"*for or against* an organization on the basis of the organization's
religious character or affiliation." (emphasis added). Under the rule,
all organizations, whether religious or non-religious, are eligible to
apply and compete for USAID funding according to the same criteria. And
it again merits emphasis that the rule forbids the use of direct
government assistance for inherently religious activities and states
that any such activity must be voluntary and separated, in time or
location, from activities directly funded by USAID.

The limitation on the use of the direct funds is not meant to put an
organization in the position of having to deny or alter its core
religious perspectives on social issues or reject government funds for
its activities that are otherwise consistent with the purposes of USAID
programs. We recognize that, while the government regards services like
feeding the hungry and housing the poor as social services or secular
work, some organizations may regard these same activities as acts of
mercy, spiritual service, fulfillment of religious duty, good works, or
the like. Nevertheless, as a general matter, an activity such as
providing food for the hungry or shelter for the homeless would
constitute an appropriate use of funds, as long as any inherently
religious activities offered by the provider are separate in time or
location, privately funded, and voluntary.

As to whether religious organizations will conform to the requirements
of the regulations, as mentioned above, the Supreme Court has rejected
the presumption that religious organizations will inevitably divert
government funds and use them for their own religious purposes. USAID
rejects the view that organizations with religious commitments cannot be
trusted to fulfill their written promises to adhere to grant
requirements.

Similarly, we do not agree that the rule poses a danger of excessive
government entanglement with religion. The rule expressly provides that
religious organization grantees will retain their independence,
including with respect to religious symbols, selection of board members,
and internal governance. Religious organizations receiving USAID funding
will be subject to the same program eligibility and ex-post funding
restrictions that apply to non-religious organization grantees. USAID
will apply the same cost-accounting principles to all organizations.
Because inherently religious activities are non-USAID activities, USAID
need not distinguish between program participants' religious and
nonreligious non-USAID activities; the same mechanism by which USAID
polices the line between eligible and ineligible activities will serve
to exclude inherently religious activities from funding. The amount of
oversight of religious organizations necessary to accomplish these
purposes is no greater than that involved in other publicly-funded
programs that the Supreme Court has sustained.

Some organizations may be unable or unwilling to separate their
inherently religious activities in time or location, as required. Those
organizations would not qualify for direct funding by the Agency, but
might be eligible for indirect funding.

[Comment]{.underline}: One commenter advocated less stringent
eligibility requirements for religious organizations' participation in
USAID programs. This commenter argued that, because many religious
organizations "integrated" social and health-related services with
spiritual activities, the prohibition on direct funding of "inherently
religious activities" should be removed, waived or at least narrowed.
The commenter advanced numerous arguments for this view, including the
overall magnitude and urgency of the global HIV/AIDS crisis; the
reported effectiveness of combining humanitarian and spiritual services;
the lack of formal church-state separation requirements in many host
countries; the adequacy of "coercion safeguards" in place of a flat
prohibition on inherently religious activities; and the impracticalities
of separating humanitarian and spiritual activities and funds of
religious organizations.

[USAID Response:]{.underline} The Agency agrees that religious
organizations may contribute significantly to efforts to address global
challenges such as HIV/AIDS. In addition, we recognize that some
religious organizations have unique strengths and skills in providing
comprehensive social and welfare services. For those and other reasons,
this rule makes clear that religious organizations are eligible for
Agency funding according the same criteria as non-religious
organizations. The rule prohibits direct funding of "inherently
religious activities." At the same time, the rule makes clear that a
religious organization receiving USAID funds retains its independence,
including the definition, practice, and expression of its religious
beliefs. The Agency believes that the rule sets up appropriate
parameters for the affected programs in light of current precedent's
interpretation of the constitutional provisions that govern expenditures
of U.S. funds, particularly in light of the judicial precedents
applicable in the domestic context.

*USAID-Funded Structures*

[Comment:]{.underline} One commenter believed that nothing in the rule
would prevent a faith-based organization from converting a USAID-funded
portion of a structure for a prohibited religious use at some future
date. Other commenters suggested that the rule require that the
USAID-funded portions of a structure be used for secular purposes for
the life of the building. It was also suggested that USAID establish
procedures for recapturing the Federal assistance if the USAID-funded
portion of the structure is ever used for a religious purpose. Finally,
one commenter objected to phrasing in the proposed rule that would allow
USAID and religious organizations to split the cost of acquiring,
constructing, or rehabilitating a facility, asserting that the line
between religious and nonreligious activities is not clear and that this
would result in unseemly negotiations about what constituted religious
activity and intrusive USAID monitoring of religious organizations\'
activities within dual use facilities.

[USAID Response:]{.underline} In a neutral program in which the
government directly funds the capital improvements of institutions that
administer Federal social welfare programs, even in the domestic context
the government need only put in place safeguards to ensure that public
money is not used to finance inherently religious activities. The rule
satisfies this standard by prohibiting the use of USAID funds for the
acquisition, construction, or rehabilitation of structures to the extent
that those structures are used for inherently religious activities.
There is no need for any requirement prohibiting use of non-USAID-funded
portions of buildings for inherently religious activities.

With respect to concerns about the funding of capital improvements for
religious structures that are later converted to non-USAID uses, the
rule states that the disposition of USAID-improved property after the
term of grants to religious organizations, and changes in the use of
property improved for use by religious organizations, are subject to
government-wide regulations governing real property disposition. The
Agency has promulgated regulations (see 22 CFR Part 226) that address
the terms under which such grantees must use the property for eligible
activities, and the terms under which Federally funded improvements must
be "bought back" if such grantees decide to discontinue their
involvement in the program.

We do not agree with comments that preventing the use of direct USAID
capital-improvement funds for inherently religious activities would
necessarily fail or, in the process, excessively entangle the government
in the affairs of recipients or sub-recipients that are religious
organizations. In addition, some monitoring is necessary to ensure that
direct USAID funding is not used to support inherently religious
activities. However, we do agree that the phrasing of the proposed rule
would benefit from further clarification. Therefore, the final rule
clarifies this requirement by stating that USAID funds may not be used
for acquisition, construction, or rehabilitation of sanctuaries,
chapels, or any other rooms that a religious congregation that is a
recipient or subrecipient of USAID assistance uses as its principal
place of worship.

*Time or Location Restrictions*

[Comment]{.underline}: A commenter suggested that the rule's "time or
location" provision be tightened to require that religious organizations
separate religious and any secular, government funded activities by both
time *and* location. In a similar vein, other comments suggested that
the time or location requirement be made specific to provide better
guidance for compliance.

[USAID Response:]{.underline} We decline to adopt either suggestion. As
an initial matter, USAID does not believe that the requirement is
ambiguous or necessitates additional regulation for proper adherence.
Moreover, USAID believes that separation in both time and location is
legally unnecessary and would impose an unnecessarily harsh burden on
small religious organizations, which may have access to only one
location that is suitable for the provision of the USAID-funded
service(s). The rule is clear that, when an organization receives direct
government assistance, any inherently religious activities that the
organization offers must simply be offered separately -- in time or
place -- from the activities supported by direct USAID funds. For
example, an organization may receive direct USAID funding to distribute
food in a needy community. This same organization may also host a
privately-funded prayer meeting that it invites participants to attend.
This privately-funded prayer meeting would need to be held either in a
separate location or at a separate time from the food distribution. And
it should be made clear that beneficiaries of the food distribution
program should understand that whether they join the prayer meeting is
up to them, and that their decision will have no bearing on whether they
receive services.

*Display of Religious Art, Icons and Images*

[Comment]{.underline}: One commenter stated that the rule fails to
consider that the display of religious art, icons and images alone may
create a "pervasively sectarian atmosphere" which could deter intended
program beneficiaries of a different religion. Similarly, another
commenter was concerned with possible tension, stigmatization, or abuse
if religious organization grantees were permitted to use their own or
dual-use facilities to provide social services.

[USAID Response:]{.underline} USAID disagrees with these comments. As
discussed above, even in the domestic context the Supreme Court has
abandoned the "pervasively sectarian" doctrine. Additionally, with
respect to the display of religious art, icons and images, a number of
Federal statutes affirm the principle embodied in this rule. (See, e.g.,
42 U.S.C. 290kk-1(d)(2)(B). For no other program participants do USAID
regulations prescribe the types of artwork, statues, or icons that may
be placed within or without the structures or rooms in which
USAID-funded services are provided. A prohibition on the use of
religious icons would make it more difficult for many faith-based
organizations to participate in the program than other organizations by
forcing them to procure additional space. It would thus be an
inappropriate and excessive restriction, typical of the types of
regulatory barriers that this final rule seeks to eliminate. Consistent
with constitutional guidelines, a faith-based organization that
participates in USAID programs will retain its independence and may
continue to carry out its mission, provided that it does not use direct
USAID funds to support any inherently religious activities. Accordingly,
this final rule continues to provide that faith-based organizations may
use space in their facilities to provide USAID-funded services, without
removing religious art, icons, scriptures, or other religious symbols.

As to the concern about religious stigma, the rule contains a number of
safeguards for the rights of beneficiaries. It prohibits use of direct
government funding for inherently religious activities and provides that
any participation by beneficiaries of such programs in privately funded
religious activities must be voluntary. In addition, the rule makes
clear that a provider receiving direct USAID funds cannot discriminate
against beneficiaries on the basis of religion or religious belief. In
light of these straightforward provisions, we do not believe that any
additional regulatory changes are required.

*Nondiscrimination in Providing Assistance*

[Comment]{.underline}: One comment concerned the rule's requirement that
program beneficiaries not be denied services based on religion or
religious belief. The commenter noted that this restriction could still
permit passive compulsion, such as being required to hear proselytizing
messages, or observe religious instruction or worship. The commenter
recommended that Section 205.1(e) provide specifically that services may
not be denied to a beneficiary based on a "refusal to participate in
religious practice\[s\]," and another commenter requested clarification
that a provider could not discriminate on the basis of a lack of
religious belief. Additionally, a commenter proposed that the rule
require participating religious organizations to provide notice to
program beneficiaries that their receipt of social services is not
conditioned upon participation in the provider's inherently religious
activities.

[USAID Response:]{.underline} We believe that the provision prohibiting
faith-based organizations from requiring program beneficiaries to
participate in religious activities suffices as written. In addition,
the prohibition on discrimination against beneficiaries "on the basis of
religion or religious belief" is explicit enough to include
beneficiaries who hold no religious belief. These provisions are
straightforward and require no further elaboration.

We also decline to require that religious organizations provide a notice
to a beneficiary or potential beneficiary that participation in
religious activities would be entirely on a voluntary basis. Grantees
are encouraged to take steps to ensure that clients and prospective
clients have a clear understanding of the services offered by their
organization and the strictly voluntary nature of any inherently
religious activities, and thus the individual\'s right not to
participate in any such activities, while still accepting or receiving
services. The requirement that participation be voluntary, however, is
sufficient to address concerns about the religious freedom of program
beneficiaries.

[Comment]{.underline}: The rule does not prevent government funds
flowing to "anti-Semitic, racist or bigoted organizations."

[USAID Response:]{.underline} USAID disagrees. While it is not the topic
of this rule, Federal law prohibits persons from being excluded from
participation in USAID services or subjected to discrimination based on
race, color, national origin, sex, age, or disability, and this final
rule does not in any way alter those existing prohibitions.

*Employment Discrimination*

[Comment]{.underline}: Another comment argued that the rule's
preservation of the religious organizations exemption contained in Title
VII would permit government-funded employment discrimination based on
religion.

[USAID Response:]{.underline} We do not agree with these objections to
the rule's recognition that a religious organization does not forfeit
its Title VII exemption when administering USAID-funded services. The
rule is intended to eliminate administrative barriers to religious
organizations that would otherwise be eligible for USAID program
funding. Applicable Federal statutory nondiscrimination requirements are
not altered by this rule.

The Equal Employment Opportunity Act of 1972 expanded the exemption for
religious organizations found in Title VII of the Civil Rights Act of
1964 to cover all positions offered by a faith-based employer (as
opposed simply to positions directly related to their ministries).
Congress establishes the conditions under which religious organizations
are exempt from Title VII; this rule simply recognizes that these
requirements, including their limitations, are fully applicable to
Federally funded organizations unless Congress says otherwise. In 1987,
the Supreme Court addressed and unanimously upheld the constitutionality
of Title VII's protection for religious organizations. *See Corp. of the
Presiding Bishop of the Church of Jesus Christ of Latter Day Saints v.
Amos*, 483 U.S. 327 (1987).

[]{.mark}

As to the suggestion that the Constitution restricts the government from
providing funding for social services to religious organizations that
consider faith in hiring, that view does not accurately represent the
law. The employment decisions of organizations that receive extensive
public funding are not attributable to the state, *see Rendell-Baker v.
Kohn*, 457 U.S. 830 (1982), and it has been settled for more than 100
years that the Establishment Clause does not bar the provision of direct
Federal grants to organizations that are controlled and operated
exclusively by members of a single faith. *See Bradfield v. Roberts*,
175 U.S. 291 (1899); *see also Bowen v. Kendrick*, 487 U.S. 589, 609
(1988).

[]{.mark}

Also, we would note that section 702(a) of the Civil Rights Act of 1964
is permissive. It allows religious staffing, but does not require it.
And, religious organizations are subject to Federal civil rights laws
that prohibit employment discrimination on the basis of race, color, and
national origin.

Finally, Title VII recognizes that for a faith-based organization to
define or carry out its mission, it is important that it be able to
choose its employees based on its vision and beliefs. We note that
allowing religious organizations to consider faith in hiring when they
receive Federal government funds is no different than allowing Federally
funded environmental organizations to hire those who share its views on
protecting the environment -- both groups are allowed to consider
ideology and mission, which improves their effectiveness and preserves
their independence and integrity.

For the foregoing reasons, the Agency declines to amend the final rule
to require religious organizations to forfeit their Section 702
exemption from liability under Title VII.

*Vouchers*

[Comment]{.underline}: One commenter stated that the rule contemplated
the "voucherization" of USAID-funded social services. In the view of
this commenter, voucher programs under the rule would go beyond what is
permitted under the Supreme Court's decision in *Zelman v.
Simmons-Harris,* 536 U.S. 639 (2002), since many USAID-funded
beneficiaries may not have access to comparable secular alternatives. As
a result, said this commenter, beneficiaries might feel compelled to
accept services from pervasively sectarian institutions and to submit to
worship, religious education or proselytizing.

[USAID Response:]{.underline} The Agency respectfully declines to adopt
any changes to the regulation. USAID currently does not operate any
voucher-style programs, so any further regulations in this regard would
be purely hypothetical. In addition, any voucher-style program that
might be offered by the Agency would have to comply with Federal law.

*Segregation of Program Funds*

[Comment]{.underline}: One comment voiced concern that the rule did not
ensure the creation of proper "firewalls" between government-funded
services and core religious activities of a grantee recipient. The
commenter suggested that the rule explicitly require that religious
organization grantees establish a separate corporate structure to
receive and segregate government funds and the social services supported
thereby.

[USAID Response:]{.underline} The Agency disagrees with this suggestion.
An organization is, of course, free to create a separate account for its
USAID funds. However, it would be unfair to require religious
organizations alone to comply with these additional burdens. Further,
USAID finds no basis for requiring greater oversight and monitoring of
faith-based organizations than of other program participants simply
because they are faith-based organizations. All program participants
must be monitored for compliance with program requirements, and no
program participant may use USAID funds for any ineligible activity,
whether that activity is an inherently religious activity or a
nonreligious activity that is outside the scope of the program at issue.
Many secular organizations participating in USAID programs also receive
funding from several sources (private or governmental) to carry out
activities that are ineligible for funding under USAID programs. In many
cases, the non-eligible activities are secular activities but not
activities that are eligible for funding under USAID programs. All
program participants receiving funding from various sources and carrying
out a wide range of activities must ensure through proper accounting
principles that each set of funds is applied only to the activities for
which the funding was provided. Applicable policies, guidelines, and
regulations prescribe the cost accounting procedures that are to be
followed by all recipients in using USAID funds. This system of
monitoring is more than sufficient to address the commenters\' concerns.

*Monitoring*

[Comment]{.underline}: The commenters questioned how USAID would enforce
the separation of government funds from religious-use funds and what
measures would be taken to prevent and remedy violations.

[USAID Response:]{.underline} USAID has not revised the regulation in
response to these comments because existing Agency mechanisms and
procedures are sufficient to address these concerns. USAID has a
responsibility to monitor all program participants to ensure that USAID
funds are used in accordance with its program and any other applicable
U.S. government requirements. The risks of inappropriate use of Agency
funds or non-compliance with Agency program requirements exist with all
program participants, not only religious organizations. All USAID
program participants must carefully manage their various sources of
funds, ensure that USAID funds are used only for eligible program
activities, and abide by OMB or other cost accounting methods that may
be specified in individual program regulations. Failure of any
organization to ensure that the USAID portion of their funds is not used
for prohibited purposes will result in the imposition of sanctions or
penalties on the organization, including termination of participation in
USAID programs. Moreover, any inherently religious activities would not
be funded directly by USAID, so the normal monitoring procedures would
not require the Agency to distinguish between religious and nonreligious
ineligible activities. Those procedures also involve the same processes
for the scrutiny and oversight for all grantees.

Finally, as mentioned above, consistent with Supreme Court precedent in
the domestic context, the Agency believes that religious organizations
are no less trustworthy than non-religious grantees in fulfilling their
obligations under USAID grants and programs. In issuing this rule,
USAID's general approach is that faith-based organizations are not a
category of applicants or program participants that require additional
requirements or oversight in order to ensure compliance with program
regulations. Rather, the Agency believes that faith-based organizations,
like other recipients of USAID funds, fully understand the restrictions
on the funding they receive, including the restriction that inherently
religious activities cannot be undertaken with direct Federal funding
and must remain separate from Federally funded activities. For the
foregoing reasons, the Agency does not see the need for additional
requirements or guidance in this area.

*Definition of Religious Organization*

[Comment]{.underline}: The rule does not distinguish or define
"religious organizations" and "faith-based organizations."

[USAID Response:]{.underline} In the preamble, we used the terms
"religious organization" and "faith-based organization" interchangeably.
The rule itself refers only to "religious organizations." Neither the
U.S. Constitution nor the relevant Supreme Court precedents contain
comprehensive definitions of "religion" or "religious organization" that
must be applied to this rule. Yet, an extensive body of judicial
precedent provides practical guidance for understanding these terms. In
addition, one of the objectives of this rule is to move away from
unnecessary Federal inquiry into the religious nature, or absence of
religious nature, of an applicant for USAID funds. With respect to any
applicant for USAID funds, USAID's focus should always be that (1) the
applicant is an "eligible applicant", as that term is defined for that
program; (2) the applicant meets any other participation or eligibility
criteria that the program may require; and (3) the applicant commits to
undertake only eligible activities with USAID funds and to abide by all
program requirements that govern those funds. Regardless of how an
organization labels itself, it will be treated the same under the rule.

*The Exemption for Prison Chaplains*

[Comment]{.underline}: One commenter suggested a narrowing of the rule's
exemption for direct funding of inherently religious activities
conducted by chaplains and religious organizations providing assistance
to chaplains in prisons, detention facilities or community correction
centers. This comment voiced concern that the exemption would allow an
otherwise improper blending of religious doctrine with secular
counseling.

[USAID Response:]{.underline} We continue to believe the rule's
exemption is appropriate, given the unique nature and circumstances of a
penal or correctional facility. This exception to the rule's prohibition
on direct funding of inherently religious activities contemplates
services provided by prison clergy and individuals and organizations who
work with them. Correctional institutions are heavily regulated, and
extensive government control over the prison environment means that
prison officials must sometimes take affirmative steps, in the form of
chaplaincies and similar programs, to provide an opportunity for
prisoners to practice their religious beliefs. Without such efforts,
religious freedom might not exist for prisoners. Of course, religious
activities must be voluntary for inmates.

*Miscellaneous*

[Comment]{.underline}: One commenter expressed the view that the rule
discriminates against foreign family planning non-governmental
organizations (NGOs) that use other funding sources to perform, promote
or advocate abortions, since those NGOs are ineligible for US government
assistance. The commenter stated that the rule created "special class"
status for faith-based organizations, relative to at least those NGOs
because, while the rule only required religious organizations to
separate proscribed religious activities from USAID funded programs and
services, abortion advocacy NGOs were wholly ineligible to receive funds
under the Mexico City Policy (66 FR 17303). The commenter recommended
that the Mexico City Policy be rescinded.

[USAID Response:]{.underline} The rule seeks to level the playing field
generally between religious organizations and non-religious organization
entities in respect of Agency programming and grant eligibility. The
rule is not intended to alter or rescind other rules or regulations that
may disqualify certain organizations -- religious or non-religious --
for reasons other than their status as a religious organization. The
Agency adheres to the Mexico City Policy regarding religious
organizations and other entities that advocate or engage in
abortion-related activities.

**IV. Findings and Certifications**

[Paperwork Reduction Act of 1995]{.underline}

No new information collection requirements are imposed by these
regulations, nor are any existing requirements changed as a result of
their promulgation. Therefore, the requirements of the Paperwork
Reduction Act of 1995 (44 U.S.C. 3507(d)), regarding reporting and
record keeping, are not applicable.

[Executive Order 12866\--Regulatory Planning and Review]{.underline}

Executive Order 12866, Regulatory Planning and Review, requires that
regulations be reviewed to ensure that they are consistent with the
priorities and principles set forth in the Executive Order. The Agency
has determined that this rule is consistent with these priorities and
principles. The Office of Management and Budget (OMB) reviewed this rule
under the Order and determined that this rule is a \`\`significant
regulatory action\'\' as defined in section 3(f) of the Order (although
not an economically significant regulatory action under the Order) and,
accordingly, has reviewed the rule. This rulemaking implements statutory
authority and reflects our response to comments received on the proposed
rule that we published on June 7, 2004 in the Federal Register (69 FR
31773).

[Regulatory Flexibility Act]{.underline}

The Regulatory Flexibility Act (5 U.S.C. 605(b)) requires the Federal
government to anticipate and reduce the impact of rules and paperwork
requirements on small businesses and other small entities. In accordance
with that Act, the USAID Administrator has reviewed and approved this
rule, and in so doing certifies that this rule will not have a
significant economic impact on a substantial number of small entities.

[Unfunded Mandates Reform Act]{.underline}

Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C.
1531-1538) establishes requirements for Federal agencies to assess the
effects of their regulatory actions on State, local, and tribal
governments, and on the private sector. This rule does not impose any
Federal mandates on any State, local, or tribal governments, or the
private sector, within the meaning of the Unfunded Mandates Reform Act
of 1995.

[Assessment of Federal Regulation and Policies on Families]{.underline}

Section 654 of the Treasury and General Government Appropriations Act of
1999 requires Federal agencies to determine whether a proposed policy or
regulation may affect family well-being. If the agency\'s determination
is affirmative, then the agency must prepare an impact assessment
addressing seven criteria specified in the law. The Agency has
determined that these regulations will not have an impact on family
well-being as defined in the legislation.

[Executive Order 13132]{.underline}

Executive Order 13132, Federalism, requires that Federal agencies
consult with State and local government officials in the development of
regulatory policies with federalism implications. The Agency has
determined that this rule does not have federalism implications that
require special consultations with State and local government officials.

[Intergovernmental Review]{.underline}

This final rule affects direct grant programs that are subject to
Executive Order 12372 and the regulations in 34 CFR part 79. The
objective of the Executive Order is to foster an intergovernmental
partnership and to promote Federalism by relying on processes developed
by State and local governments for coordination and review of proposed
Federal financial assistance.

The Agency has concluded that this rule will not create or affect any
Federal financial assistance to States. However, to the extent this rule
falls under the Order, we intend this document to provide early
notification of the Agency's specific plans and actions for the affected
programs.

[Congressional Review]{.underline}

This regulation is not a major rule as defined in 5 U.S.C. chapter 8.

[Catalog of Federal Domestic Assistance Numbers]{.underline}

The Catalog of Federal Domestic Assistance program numbers for the
programs affected by this rule are 98.001, 98.002, 98.003, 98.004,

98.005, 98.006, 98.007, 98.008, 98.009.

[Electronic Access to this Document]{.underline}

You may view this document, as well as other Agency for International
Development documents published in the **Federal Register**, in text or
Adobe Portable Document Format (PDF) on the Internet at the following
site: *\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.*

To use PDF you must have Adobe Acrobat Reader, \[which is available free
at this site\]. If you have questions about using PDF, call the U.S.
Government Printing Office (GPO), toll free, at 1-888-293-6498; or in
the Washington, DC area at (202) 512-1530.

**Note**: The official version of this document is the document
published in the **Federal Register**. Free internet access to the
official edition of the **Federal Register** and the Code of Federal
Regulations is available on GPO Access at:
*<http://www.gpoaccess.gov/nara/index.html>.* (The Catalog of Federal
domestic Assistance Number does not apply.)

**List of Subjects**

[22 CFR Part 202]{.underline}

Foreign aid, Grant programs, Nonprofit organizations.

[22 CFR Part 205]{.underline}

Foreign aid, Grant programs, Nonprofit organizations.

[22 CFR Part 211]{.underline}

Agricultural commodities, Disaster assistance, Food assistance programs,
Foreign aid, Grant programs, Nonprofit organizations, Reporting and
recordkeeping requirements.

[22 CFR Part 226]{.underline}

Accounting, Colleges and universities, Foreign aid, Grant programs,
Hospitals, Nonprofit organizations, Reporting and recordkeeping
requirements.

For the reasons stated above, Chapter II of title 22 of the Code of
Federal Regulations is amended as follows:

**PART 202\--OVERSEAS SHIPMENT OF SUPPLIES BY VOLUNTARY NON-PROFIT
RELIEF AGENCIES**

1\. The authority citation for part 202 revised to read as follows:

Authority: 22 U.S.C. 2381(a).

2\. Add Sec. 202.10 to read as follows:

[Sec. 202.10 Participation by faith-based organizations.]{.underline}

The procedures established under this part shall be administered in
compliance with the standards set forth in part 205, Participation by
Religious Organizations in USAID Programs, of this chapter.

3\. Revise part 205 to read as follows:

**PART 205\--PARTICIPATION BY RELIGIOUS ORGANIZATIONS IN USAID
PROGRAMS**

Authority: 22 U.S.C. 2381(a).

[Sec. 205.1 Grants and cooperative agreements.]{.underline}

\(a\) Religious organizations are eligible, on the same basis as any
other organization to participate in any USAID program for which they
are otherwise eligible. In the selection of service providers, neither
USAID nor entities that make and administer sub-awards of USAID funds
shall discriminate for or against an organization on the basis of the
organization\'s religious character or affiliation. As used in this
section, the term "program\'\' refers to Federally funded USAID grants
and cooperative agreements, including sub-grants and sub-agreements. The
term also includes grants awarded under contracts that have been awarded
by USAID for the purpose of administering grant programs. As used in
this section, the term \`\`grantee\'\' includes a recipient of a grant
or a signatory to a cooperative agreement, as well as sub-recipients of
USAID assistance under grants, cooperative agreements and contracts.

\(b\) Organizations that receive direct financial assistance from USAID
under any USAID program may not engage in inherently religious
activities, such as worship, religious instruction, or proselytization,
as part of the programs or services directly funded with direct
financial assistance from USAID. If an organization conducts such
activities, the activities must be offered separately, in time or
location, from the programs or services funded with direct financial
assistance from USAID, and participation must be voluntary for
beneficiaries of the programs or services funded with such assistance.
These restrictions on inherently religious activities do not apply to
programs where USAID funds are provided to chaplains to work with
inmates in prisons, detention facilities, or community correction
centers, or where USAID funds are provided to religious or other
organizations for programs in prisons, detention facilities, or

community correction centers, in which such organizations assist
chaplains in carrying out their duties.

\(c\) A religious organization that participates in USAID-funded
programs or services will retain its independence and may continue to
carry out its mission, including the definition, practice, and
expression of its religious beliefs, provided that it does not use
direct financial assistance from USAID to support any inherently
religious activities, such as worship, religious instruction, or
proselytization. Among other things, a religious organization that
receives financial assistance from USAID may use space in its

facilities, without removing religious art, icons, scriptures, or other
religious symbols. In addition, a religious organization that receives
financial assistance from USAID retains its authority over its internal
governance, and it may retain religious terms in its organization\'s
name, select its board members on a religious basis, and include
religious references in its organization\'s mission statements and other
governing documents.

\(d\) USAID funds may not be used for the acquisition, construction, or
rehabilitation of structures to the extent that those structures are
used for inherently religious activities. USAID funds may be used for
the acquisition, construction, or rehabilitation of structures only to
the extent that those structures are used for conducting eligible
activities under this part. Where a structure is used for both eligible
and inherently religious activities, USAID funds may not exceed the cost
of those portions of the acquisition, construction, or rehabilitation
that are attributable to eligible activities in accordance with the cost
accounting requirements applicable to USAID funds in this part.
Sanctuaries, chapels, or other rooms that a USAID-funded religious
congregation uses as its principal place of worship, however, are
ineligible for USAID-funded improvements. Disposition of real property
after the term of the grant, or any change in use of the property during
the term of the grant, is subject to government-wide regulations
governing real property disposition. (See 22 CFR Part 226).

\(e\) An organization that participates in programs funded by financial
assistance from USAID shall not, in providing services, discriminate
against a program beneficiary or potential program beneficiary on the
basis of religion or religious belief.

\(f\) No grant document, contract, agreement, covenant, memorandum of
understanding, policy, or regulation that is used by USAID shall require
only religious organizations to provide assurances that they will not
use monies or property for inherently religious activities. Any such
restrictions shall apply equally to religious and secular organizations.
All organizations that participate in USAID programs, including
religious ones, must carry out eligible activities in accordance with
all program requirements and other applicable requirements governing the
conduct of USAID-funded activities, including those prohibiting the use
of direct financial assistance from USAID to engage in inherently
religious activities. No grant document, agreement, covenant, memorandum
of understanding, policy, or regulation that is used by USAID shall
disqualify religious organizations from participating in USAID\'s
programs because such organizations are motivated or influenced by
religious faith to provide social services, or because of their
religious character or affiliation.

\(g\) A religious organization\'s exemption from the Federal prohibition
on employment discrimination on the basis of religion, set forth in Sec.
702(a) of the Civil Rights Act of 1964, 42 U.S.C. 2000e-1, is not
forfeited when the organization receives financial assistance from
USAID.

\(h\) Many USAID grant programs require an organization to be a
\`\`nonprofit organization\'\' in order to be eligible for funding.
Individual solicitations that require organizations to have nonprofit
status will specifically so indicate in the eligibility section of a
solicitation. Grantees should consult with the appropriate USAID program
office to determine the scope of any applicable requirements. In USAID
programs in which an applicant must show that it is a nonprofit
organization, other than programs which are limited to registered
Private and Voluntary Organizations, the applicant may do so by any of
the following means:

\(1\) Proof that the Internal Revenue Service currently recognizes the
applicant as an organization to which contributions are tax deductible
under section 501(c)(3) of the Internal Revenue Code;

\(2\) A statement from a state taxing body or the state secretary of
state certifying that:

> \(i\) The organization is a nonprofit organization operating within
> the State; and
>
> \(ii\) No part of its net earnings may lawfully benefit any private
> shareholder or individual;

\(3\) A certified copy of the applicant\'s certificate of incorporation
or similar document that clearly establishes the nonprofit status of the
applicant; or

\(4\) Any item described in paragraphs (b)(1) through (3) of this
section if that item applies to a state or national parent organization,
together with a statement by the State or parent organization that the
applicant is a local nonprofit affiliate.

> \(i\) The Secretary of State may waive the requirements of this
> section in whole or in part, on a case-by-case basis, where the
> Secretary determines that such waiver is necessary to further the
> national security or foreign policy interests of the United States.

**PART 211\--TRANSFER OF FOOD COMMODITIES FOR FOOD USE IN DISASTER
RELIEF, ECONOMIC DEVELOPMENT, AND OTHER ASSISTANCE**

1\. The authority citation for part 211 is revised to read as follows:

Authority: 7 U.S.C. 1726a(c).

2\. Add Sec. 211.13 to read as follows:

[Sec. 211.13 Participation by religious organizations.]{.underline}

The funds provided under this part shall be administered in compliance
with the standards set forth in part 205, Participation by Religious
Organizations in USAID Programs, of this chapter.

**PART 226\--ADMINISTRATION OF ASSISTANCE AWARDS TO U.S. NON-**

**GOVERNMENTAL ORGANIZATIONS**

1\. The authority citation for part 226 is revised to read as follows:

Authority: 22 U.S.C. 2381(a).

2\. Amend Sec. 226.1 to add the following text at the end of the
section:

[Sec. 226.1 Purpose and applicability.]{.underline}

\* \* \* This part shall be administered in compliance with the
standards set forth in part 205, Participation by Religious
Organizations in USAID Programs, of this chapter.

Dated: \_\_\_\_\_\_\_\_, 2004.

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

Andrew S. Natsios,

USAID Administrator.

\[FR Doc. 04-\_\_\_\_\_\_ Filed \_\_\_\_\_\_\_\_-04; \[time\]\]

[^1]: As used in this rule, the terms "direct USAID assistance" or
    "direct financial assistance from USAID" refers to direct funding
    within the meaning of the Establishment Clause of the First
    Amendment as it has been interpreted to apply in the domestic
    context. For example, direct USAID assistance may mean that the
    government or an intermediate organization with similar duties as a
    governmental entity under a particular USAID program selects an
    organization and enters a grant relationship with the organization
    for provision of needed services. In contrast, many indirect funding
    scenarios place the choice of service provider in the hands of a
    beneficiary, and then pay for the cost of that service through a
    voucher, certificate, or other similar means of payment.

[^2]: It is possible that a less stringent standard would apply to
    foreign assistance. *Cf. DK Memorial Fund v. AID*, 887 F.2d 275
    (D.C. Cir. 1989). Given that this regulation satisfies the standards
    that apply in the domestic context, it follows *a fortiori* that it
    would also satisfy any less stringent standard.