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Final Rule: Conditions for Imposition of Remedial Actions Applicable to Letter of Credit Administration


Published: January 18, 1984


Jan. 18, 1985

Remedial Actions Applicable to Letter of Credit Administration




January 18, 1985


SUBJECT: Remedial Actions Applicable to Letter of Credit Administration; Conditions for Imposition


ATTACHMENT: Attached are final regulations issued by the Office of the Secretary, Department of Health and Human Services (HHS) that govern the imposition of remedial actions against recipient organizations holding letters of credit under programs administered by HHS (including the IV-D Child Support Enforcement program). These regulations describe the conditions that may prompt the imposition of remedial actions and establish uniform procedures for imposing such actions.

EFFECTIVE DATE: February 6, 1985

INQUIRIES TO: OCSE Regional Representatives.

Deputy Director

Office of Child Support Enforcement


Office of the Secretary

45 CFR Part 77

Remedial Actions Applicable to Letter of Credit Administration; Conditions for Imposition.

AGENCY: Office of the Secretary, HHS.

ACTION: Final rule.

SUMMARY: These regulations govern the imposition of remedial actions against recipient organizations holding letters of credit under programs administered by the Department of Health and Human Services. The regulations describe the conditions that may prompt the imposition of remedial actions and establish uniform procedures for providing affected recipient organizations: (1) Adequate notice of the grounds upon which proposed remedies are based, (2) an opportunity to respond to the legal and factual bases of the proposed remedies, and (3) a reasoned decision that articulates the factual and legal bases of the proposed remedies.

EFFECTIVE DATE: February 6, 1985.

FOR FURTHER INFORMATION CONTACT: David V. Dukes, (202) 245-7084.


I. Background

On March 8, 1983, we published in the Federal Register proposed rules that would govern the conditions that give rise to the imposition of remedial actions for violations of requirements pertinent to letter of credit administration and the procedures that would be used to impose remedial actions.

Under the letter of credit system, grantees and contractors (recipient organizations) are financed by either a Federal Reserve Bank Letter of Credit (FRB-LOC) or a Treasury Financial Communication System Letter of Credit (TFCS-LOC). Under the FRB-LOC, recipient organizations draw their awards directly from the United States Treasury through letters of credit maintained in Federal Reserve Banks. Under the TFCS-LOC, recipient organizations draw their cash advances against their awards directly from the United States Treasury through letters of credit maintained by the United Sates Treasury Disbursing Office. It is the grant award or contract that constitutes the authorization to draw federal funds, not the letter of credit. The letter of credit is only a payment device that facilitates the transfer of federal funds from the Treasury to the individual grantee or contractor. Basic authorities governing withdrawal of federal cash under the letter of credit system were issued by the Treasury Department in its Circular No. 1075, now codified at 31 CFR Part 205 and in the Treasury Fiscal Requirements Manual. The Department has published a compendium of policies and procedures for grantees and contractors whose awards under Departmental programs are paid by letter of credit called the "Departmental Federal Assistance Financing System Policy and Procedure Manual for Recipients" (DFAFS Manual). Within the Department administration of the letter of credit process lies largely with the Department Federal Assistance Financing System, but is also shared with the Assistant Secretaries for Health and Human Development Services, and the Administrator of the Health Care Financing Administration.

We published the proposed rules because, notwithstanding the thousands of letters of credit through which the Department finances grants and contracts, there has never been a uniform procedure for the resolution of disputes that arise over letter of credit administration. We believe that having such procedures will be useful both as a sound management tool for the Department and as a guide to inform grantees and contractors of procedures that may affect the manner by which federal funds are disbursed to them under grants and contracts issued by this Department.

II. Discussion of Major Comments

Over forty comments were received from State agencies, universities, and various organizations. The recommendations of the commenters and our responses follow:

Comment: Four States and one university expressed concern that certain delays in the grant process that are attributable only to the Department might cause a grantee to draw funds from its letter of credit in excess of existing grant authority, thereby unfairly triggering remedial steps by the Department. For example, a State may not be timely advised of a negative grant award, causing an unintentional overdraw; or, the federal program agency may not promptly advise DFAFS of increasing supplemental grant awards that would serve to cover what DFAFS perceives as an overdraw.

Response: To a limited extent these comments reflect legitimate concerns about the grant process, but they misperceive the intent of these regulations. The Department commonly issues negative grant awards, for example immediately following a Grant Appeals Board decision that is adverse to a State when the State has been holding the disputed funds. Here, however, it is virtually always the case that by the time a grantee receives formal notice of the downward adjustment to its grant award it has long since been advised informally by the granting agency of the forthcoming action. Thus, the grantee should have ample time to make the necessary adjustments to avoid overdraws of its outstanding grant award authority. The issue is much the same with increasing supplemental grant awards which the Department may issue, for example, when a deferred claim is determined to be programmatically allowable. Here, there have been occasions of time lags between the granting agency and DFAFS that have temporarily caused DFAFS to believe that the grantee may have overdrawn its outstanding grant authority. In neither example, however, would the Department automatically seek to take remedial actions under the terms of these regulations. Rather than providing a "triggering" device that would automatically bring into play the remedial steps outlined in the regulations every time a grantee or contractor temporarily overdraws a grant, these regulations are designed to address only the most serious or continuing violations. In the examples posed by the commenters, no action would be taken by the Department until it first determined (through consultation between DFAFS and the granting agency) that a violation had in fact occurred and, second, a judgment had been made that remedial action had to be taken to protect the integrity of the letter of credit system. Unless the grant overdraw was serious and could not be remedied by informal means, or the violation demonstrated a grantee's or contractor's continuing mismanagement of its letter of credit, it is very likely that the Department would not resort to the procedures set forth in these regulations. Because these regulations provide a comprehensive set of procedures applicable to all formal disputes, they will not be aimed at curing the temporary or unintentional problems posed by the commenters.

Comment: Three universities objected to what they believed was the possibility of having to report all draws under each grant award in order to document that individual grant award authorities were not being exceeded.

Response: We are not asking universities to report to us on each and every draw that there is currently available grant award authority. We are interested, however, in making sure that at the time universities report to us their expenditures (whether on a monthly or quarterly basis) that the proper adjustments have been made to reconcile their expenditures with available grant award authority. Moreover, this requirement to reconcile expenditures with existing grant award authority is fundamental to a sound cash management system and, for this reason, has been reflected in Department grant policy for many years.

Comment: Several States and universities commented that the provision relating to the possible imposition of remedial action because of a recipient organization's failure to file timely reports was overly broad because it did not indicate what was meant by "timely" or "other data." These commenters expressed concern that there is not enough time now for them to be "timely" and that they would be continually liable to remedial actions by the Department.

Response: These regulations do not establish any reporting deadlines; any deadlines that recipient organizations must meet are already set forth in other federal regulations. Thus, we do not believe that these regulations need to incorporate all pre-existing reporting requirements or otherwise define what is meant by "timely" since that term has already been defined elsewhere. Similarly, the reference to "other data" in the regulation is not intended to create a new body of reporting requirements, but rather refers to existing requirements that are too numerous or detailed to warrant explicit incorporation into theseregulations.

In response to those commenters that fear continual enforcement efforts by the Department to remedy occasional failures to file timely reports, we can only say that these regulations are not designed to remedy minor reporting failures by grantees and contractors. The Department has no intention to seek remedial action under these regulations if, for example, reports are "one day late", or occasionally late, as one commenter suggested. Whether the remedial actions specified in these regulations come into play will very much reflect the use of judgment not an automatic "triggering," and will be used only after informal attempts at corrective action have failed. As we indicated earlier, the regulations are designed to address situations in which patterns of conduct regarding untimely reporting are so improper that they impair the Department's ability to assure the integrity of the letter of credit system.

Comment: One State suggested that the Department already has existing protective measures to remedy a grantee's failure to comply with program reporting requirements.

Response: While it is true that existing program authorities provide remedies to address a grantee's or contractor's failure to abide by pertinent reporting requirement, those remedies are geared solely to underlying grant or contract eligibility. For example, should a State agency under the Medicaid program habitually fail to file needed data with the Health Care Financing Administration, the Department can exercise its authority under Section 1904 of the Social Security Act to withhold program funds from the State until such time as the State returns to compliance with the program's reporting requirements. Barring recourse to this drastic remedy, the Department has no uniform set of procedures that focus on the payment mechanism through which the grantee receives federal funds, as distinguished from its underlying grant eligibility. Thus, these regulations provide the Department with greater flexibility to remedy certain program deficiencies without disturbing underlying entitlements or otherwise disrupting project activities.

Comment: Several commenters have asked us to define what we mean by the accumulation of "excess amounts" of federal funds relative to a recipient organization's actual and immediate disbursement requirements.

Response: We have found it to be both unrealistic and unworkable to attach a fixed or arbitrary standard to the concept of "excess amounts" of federal cash. Dollar amounts cannot be used because of the vastly differing amounts of grants and contracts that are subject to the same rule. Similarly, a fixed percentage or fixed number of days' accumulation is too inflexible and does not account for circumstances that may temporarily cause a departure from what is otherwise a sound cash management system.

We do believe, however, that certain judgments can be made by analyzing the spending patterns of recipient organizations and comparing them to the level and frequency of draws that are made from their letters of credit; and, it is this assessment that will dictate whether the Department finds it necessary to intervene into a deficient cash management system. It is relevant, for example, to determine whether a recipient organization has sums of money on hand when there is no discernible obligation that must be met immediately that would have prompted it to make the draw when it did. It should also be relevant to determine whether draws are tied to current disbursements or whether they are arbitrarily drawn regardless of current disbursement needs. Certainly in the case of a State that has overestimated a quarterly level of expenditures in the Medicaid or AFDC program, there would be no justification for making draws from its letter of credit beyond the expenditures it incurred during the quarter.

Because we are mindful of the flexibility that is built into the concept of "excess amounts" of federal funds, and the potential for varying interpretations, we do not expect to invoke this provision automatically whenever a potential problem is identified. We would want to determine informally in the first instance whether the Department's preliminary judgment that there is an excessive amount of cash on hand can be satisfactorily explained by the recipient organization; or, we would want to determine whether this particular cash management difficulty is unique or reflective of a pattern that increases the likelihood of the Department's seeking corrective action.

Comment: While two States expressed approval of the provision providing for remedial action in cases of a recipient organization's "misrepresentations, fraud, or abuse" (Section 77.3(e)), four commenters expressed concern about this provision's lack of specificity. In particular, these commenters wanted to know what standards would be applied to determine whether cash management deficiencies existed.

Response: As we have indicated already, these regulations do not purport to establish any substantive requirements that do not already exist. These regulations set forth a series of procedures that may be applied if other pre-existing substantive program requirements are violated. To this extent, we do not believe there is a need to enumerate the lengthy list of program requirements that govern grantee and contractor performance under the 284 programs through which this Department disburses federal funds by letters of credit. Thus, standards of program performance are already set forth in 45 CFR Part 74 or in Treasury Department regulations at 31 CFR Part 205. State and local governments and universities may look additionally to the Appendixes to Part 74 to identify perhaps the primary example of federal requirements that dictate standards of financial reporting and cash management. To further define terms such as "generally accepted accounting principles" or "irregularities" would necessitate interpretation of the Department's various underlying program regulations, which is clearly outside the scope of these procedural regulations.

Comment: One university was concerned that the Department would use these regulations to make judgments arbitrarily about the adequacy of a grantee's cash management system when those judgments are better left to the grantee's independent auditors.

Response: It is not our intention to use these regulations as a management tool to coerce a grantee or contractor to use one system or technique over another where either meets generally acceptable standards of operating a cash management system. Rather, these regulations are focused on addressing violations of existing program regulations that reflect on a grantee's or contractor's cash management system. To the extent that a grantee or contractor meets these underlying program regulations, it is irrelevant to the Department which among the many methods of managing federal cash the grantee or contractor is using.

Comment: One State wanted some clarification of what criteria might be used by the Department in determining the choice and severity of remedial action and one public organization expressed its expectation that the Department would not precipitate remedial actions for minor or temporary aberrations in letter of credit procedures.

Response: The range of possible violations of requirements that bear on letter of credit administration is as broad as the regulations and published procedures that govern this activity. Apart from requirements that stem from the Department's Payment Management System (PMS) manual and Treasury regulations that address letter of credit requirements applicable to all recipient organizations, there is a vast array of program regulations some of which bear on letter of credit administration. Because of this broad scope of pertinent legal authorities, we cannot realistically establish a mechanical set of guidelines that would dictate which type of remedial action the Department would take for violations of each applicable requirement. Rather, our approach to determinations of whether to take remedial action and, if so, the selection of a suitable remedy, would be a reflection of several considerations that would be pertinent regardless of which grant or contract is at issue. First, to reiterate a position stated earlier, we do not view the imposition of remedial steps under these regulations to be automatic each and every time the Department identifies a violation of applicable requirements. Whether the Department discerns a threat to the integrity of the letter of credit system and the protection of federal funds will hinge primarily on the severity of the violation. Thus, if a grantee fails to submit a required report by a time specified in regulations or temporarily neglects to coordinate draws against a recently issued negative grant award, we would not be inclined to resort to these regulations when the problem is of such a passing nature and, in almost all cases, is resolved through informal processes. If, on the other hand, a grantee draws in flagrant violation of what it knows (or should know) to be its outstanding grant authority or is so delinquent in the submission of required data that we cannot maintain an adequate check of the flow of federal funds, remedial action is far more likely. Whether remedial action is taken will also be dictated by the frequency of the violation and whether the Department perceives the recipient organization as a chronic abuser of its letter of credit privileges. Similarly, whether the Department has a continuing relationship with a recipient organization (in such a manner as to reasonably assure us that necessary recoveries can always be made by applicable offset procedures) may influence a decision to pursue remedial actions.

Comment: One university objected to the possibility that the Department might impose a monthly dollar ceiling for the expenditure of federal funds because it would unfairly restrict a project director's expenditure authority.

Response: We do not concur. Dollar ceilings are universal in letter of credit administration and are based on spending plans developed by the grantee. Thus, any limitations imposed on a monthly basis are, in the first instance, a reflection of how the grantee, not the Department, defines its spending patterns. Should a grantee have substantial cash on hand, this demonstrates that the grantee's suggested spending pattern (and dollar ceiling) is erroneous and does not in fact reflect actual grant needs or practices. To this extent, the adjustment of a dollar ceiling should not have any adverse impact on grant administration.

Comment: One State objected to the possibility that the Department might impose more stringent reporting requirements on grantees as a result of cash management deficiencies since this type of action would be inconsistent with OMB Circular A-102.

Response: We do not concur. Department grant requirements in 45 CFR Part 74 (which incorporated provisions of OMB Circular A-102, the uniform grant administration requirements for State and local governments) explicitly provide authority (at 45 CFR 74.7) for the Department to impose stricter grant conditions than those otherwise set forth in Part 74. Since Part 74 sets forth a number of reporting requirements applicable to grantees (e.g., 45 CFR 74.70-74.76), it is entirely consistent with OMB Circular A-102 to impose stricter reporting requirements on a grantee if such action is warranted.

Comment: One university and a public organization expressed their concern that the regulations might tend to polarize the Department and recipient organization and tend to discourage the informal resolution of differences that might arise over letter of credit administration.

Response: It is not our intent to resort to the procedures set forth in these regulations every time a problem surfaces between the Department and a recipient organization. As we have indicated already, we except that these regulations will be used only in situations which the Department believes represent a serious threat to its ability to protect federal funds under the letter of credit system. In what we believe to be the vast majority of cases in which a dispute arises, the dispute is easily resolved by informal means. Indeed, in many respects we view these regulations as coming into play when attempts at informal resolution have not succeeded and the Department believes that a more formal remedial procedure is appropriate.

Comment: One State and one university objected to what they view as an unconstitutional denial of an oral hearing under these regulations.

Response: We do not concur. First, oral hearings are not prohibited under these regulations. Under §77.5(a)(4), the official designated to make a final decision on remedial actions is empowered to convene an informal conference or to hear an oral presentation by the parties if in so doing that official believes that this would materially enhance making a decision in the matter. We decided not to make oral conferences mandatory for every dispute because we believe that in most cases the ability of the deciding official to reach a final decision without such conferences will not be impaired. The nature of the disputes that will fall under these regulations will in almost every case be resolved by recourse to the pertinent documents that underlie the dispute and to the written arguments that accompany those documents. Certainly in these disputes witness credibility would not be an issue and this further reduces the need for oral conferences. Moreover, to require an oral hearing in all cases would be inordinately costly and unduly delay the prompt resolution of matters that are of importance to the Department and recipient organizations. In an attempt to strike a balance between these competing considerations, deciding officials will always have the discretion to call for an oral presentation if, after reviewing the written record, there still exists a need for further explanation in order to reach a reach a decision.

Even when no oral hearing is made available to a recipient organization, we believe that no infringement upon due process principles has been made by these regulations. As we explained in the preamble to the proposed rule (48 CFR 9669), due process is a flexible concept that does not always require the opportunity for an oral hearing. How comprehensive a set of procedures, such as those set forth in these regulations, must be is a reflection of a balancing of the needs of both the affected party and the government. As discussed above, we believe that we have struck the necessary balance of interests between a recipient organization's need for an adequate airing of its defense and the government's need for a prompt and cost-effective decision.

We wish to stress that a basic principle underlying the design of these regulations is that a letter of credit is not an entitlement. A letter of credit is simply one payment device, among many, that facilitates the flow of federal grant or contract funds. Thus, should the Department invoke the procedures set forth in these regulations it could affect the manner of payment only, not a grantee's or contractor's underlying entitlement, if any, to receive the funds necessary to carry out the grant or contract. Whether a grantee or contractor is entitled to receive any funds is a matter that rests with the substantive program authority of the various components of the Department and is outside the scope of these regulations.

Comment: One university objected to what it believed would be the imposition of remedial action with only thirty days' notice and expressed its concern that this short time period would not allow for a full airing of the issues.

Response: Section 77.5(a)(2) of the regulations provides for the imposition of remedial actions within thirty days of the recipient organization's receipt of the notice only if the organization does not submit a response within the thirty day period. If a response is received within thirty days of the notice, no remedial action is imposed until after the completion of the procedures (including the issuance of a final decision) set forth in the regulations.

Comment: One university objected to the absence of an opportunity in the regulations for recipient organizations to respond to the Department's rebuttal when the matter is before the deciding official.

Response: In cutting off the opportunity to submit documents and written arguments to the deciding official with the Department's rebuttal, if any, we believe we are striking a fair balance between a recipient organization's opportunity to address the matter in dispute fully and the Department's need to avoid unnecessary extensions in the process. Once a recipient organization receives notice of a proposed remedial action, it will have all the information it needs to respond fully to the issues raised by the Department. We have included an opportunity for the Department to rebut the recipient organization's submission essentially because it will be the only opportunity for the Department to put before the deciding official a fully substantive explanation of its arguments for the proposed remedial action and a direct response to the points raised by the recipient organization. Without the Department's rebuttal, the official would have before him a potentially comprehensive brief of the recipient organization on the one hand and only the Department's notice on the other. While the notice will set forth the basis of the Department's intended action, it would clearly not provide a comprehensive submission on the order of a recipient organization's brief and obviously could not be responsive to the points that might be raised by the recipient organization.

Comment: One university and one State suggest that with respect to emergency remedial actions the regulations should be revised to permit: (1) Additional time for the recipient organization to respond before implementing the remedial action, (2) a more prompt provision of written notice, and (3) a remedy for lost earnings if the Department erroneously takes remedial action.

Response: We do not concur with the suggested revisions. First, by providing additional time to a recipient organization before the Department takes emergency actions under these regulations, the Department loses valuable time in taking an action that it has already determined essential to the protection of federal grant or contract funds. The Department must be able to retain this ability to act swiftly in these cases. As we explained in the preamble to the proposed rule (48 FR 9670), we expect this procedure to be used only in the most extreme cases of serious cash management deficiencies and primarily with respect to recipient organizations with whom the Department does not have a continuing relationship under its programs.

Insofar as the suggestions for more prompt written notices are concerned, we might be more inclined to shorten the time for such notice were it not for the oral notice requirement already set forth in the regulations. Under this requirement, which provides for oral notice within one business day of the Department's action, an affected party will receive very prompt notice of the nature of and reasons for the emergency action. Thus, by the time that a recipient organization receives a written notice within seven business days of the action, it will already have a clear understanding of the events that caused the Department's emergency response. We believe that the combination of oral and written notice under this procedure is reasonable in light of the critical circumstances that might prompt the Department to act.

Lastly, the Department does not believe it should provide for "lost earnings" should it subsequently determine that an emergency remedial action was unwarranted. If a recipient organization has been administering its grant or contract correctly, it draws from its letter of credit should approximate very closely its immediate cash needs. To this extent, there should be no "earnings" insuring the organization. Moreover, if, under the regulation's emergency procedures, the Department should remove letter of credit authority from a recipient organization and replace it with another parent device, the recipient organization would continue to receive the funds necessary to administer its grant or contract (if it is still owed funds) and would not suffer the loss of cash flow required for its activities.

III. Changes In the Final Regulations

We have made the following technical changes in these regulations:

1. The phrase "file in a timely fashion" in §77.3(c) has been revised to read "file timely" to make clear that we are referring to specific filing deadlines that already appear in pertinent federal regulations.

2. The word "otherwise" has been deleted from §77.3(e) so as to remove the incorrect implication that a recipient organization's failure to comply with well recognized accounting principles necessarily means that such failure is an example of an irregularity, misrepresentation, fraud, or abuse.

3. The word "sanction" has been revised to read "remedial action" throughout the regulation to remove what we perceived to be a pejorative term that in other contexts applies to suspensions or debarment of grantees or contractors. As we have indicated in the preamble, a change of payment mechanisms (that could occur under these regulations) does nothing to disturb a recipient organization's underlying entitlement, if any, to the funds it is receiving under a grant or contract with the Department.

4. The reference in §77.3(e) to "well recognized accounting principles" has been changed to "generally accepted accounting principles" to conform to the phrase most commonly used under the Department's grant programs and contracts.

IV. Impact Analysis

Executive Order 12291

We have determined that these final regulations do not meet

the criteria for a major rule that are set forth in section 1(b) of Executive Order 12291. That is, the final regulations would not:

1. Have an annual effect on the economy of $100 million or more;

2. Cause a major increase in costs or prices for consumers, individual industries, government agencies, or geographic regions; or

3. Have a significant adverse effect on competition, employment, investment, productivity, innovation, or the ability of United States-based enterprises to compete with foreign-based enterprises in domestic or export markets.

We have made this determination because the final rules would not require recipient organizations to alter the manner in which they administer their grant programs or contracts. These regulations would simply provide all recipient organizations with a well defined set of procedures that should facilitate their requests for an orderly review of potentially adverse determinations affecting the manner of payment under their grant or contract. Additionally, these regulations would remove the uncertainty that now exists among organizations as to the process for resolution of issues they may have with the Department concerning cash management issues.

Regulatory Flexibility Analysis

We have reviewed this regulatory initiative in light of the

Regulatory Flexibility Act (5 U.S.C. ch. 6), and we have concluded that it will not have a significant economic impact on a substantial number of small businesses, organizations, or government jurisdictions. As discussed above, the final regulations would not impose any new requirements on recipient organizations that receive federal funds through the letter of credit system. Indeed, requirements for grant and contract administration would remain wholly unaffected by these regulations. We believe that the final regulations would, in fact, benefit holders of Departmental letters of credit because for the first time recipient organizations would have available to them well defined procedures that expressly address the resolution of disagreements that often occur with the Department concerning letter of credit administration.

V. List of Subjects in 45 CFR Part 77

Credit, Grants administration, Penalties.

Dated: December 11, 1984.

Margaret M. Heckler,



45 CFR 1.2 is revised as set forth below:

§1.2 Subject matter of Office of the Secretary regulations Parts 1-99.

This subject matter of the regulations in Parts 1-99 of this title includes:

  • Civil rights/nondiscrimination: Parts 80, 81, 83, 84, 86, 90.
  • Protection of human subjects: Part 46.
  • Day care requirements: Part 71.
  • Information, privacy, advisory committees: Parts 5, 5a, 5b, 11, 17, 99.
  • Personnel: Parts 50, 67, 73, 79a.
  • Grants and letter of credit administration, property, hearing rights: Parts 10, 12, 16, 18, 74, 76, 77, 95.
  • Claims: Parts 30, 35.
  • Inventions and patents: Parts 6, 7, 8.
  • Miscellaneous: Parts 3, 4, 9, 19, 67.

45 CFR is amended by adding a new Part 77 as set forth below:



77.1 Purpose.

77.2 Scope.

77.3 Conditions that may give rise to remedial actions.

77.4 Remedial actions.

77.5 Remedial action procedures.

77.6 Emergency procedures.

Authority: 5 U.S.C. 301.

§77.1 Purpose

Letters of credit with the United States Treasury, issued by the Department to States or other grantees and contractor, are a convenient means for disbursing Federal funds to recipients of grant awards or contracts (recipient organizations) under the programs of this and other Executive Departments. The sound and efficient operation of the letter-of-credit system is dependent in large part upon the honesty, good faith, and responsible financial management of recipient organizations that receive funds pursuant to letters of credit. This part sets forth conditions that may prompt the Department to seek remedial action against a recipient organization operating under a letter of credit and the procedures that will be used to reach a final decision regarding the taking of remedial actions against a recipient organization.

§77.2 Scope.

The regulations in this part apply to all recipient organizations under any program administered by the Department through which the organization receives Federal funds under a letter of credit.

§77.3 Conditions that may give to remedial actions.

If the Department determines that any of the following conditions is present in a recipient organization's administration of a letter of credit, it may take remedial actions against the organization:

(a) A recipient organization draws Federal funds through its letter of credit in excess of the aggregate grant award or contract authority currently available to it.

(b) A recipient organization draws Federal funds for a particular program in excess of currently available grant award or contract authority for that program, even though the organization may not have exceeded its aggregate grant award or contract authority.

(c) A recipient organization fails to file timely all reports and other data required by the Department in connection with its grant awards, contracts, or letter of credit.

(d) A recipient organization accumulates, through its letter of credit or otherwise, excess amounts of Federal funds relative to its actual and immediate disbursement requirements.

(e) A recipient organization's cash management system fails to comply with generally accepted accounting principles or Departmental regulations or demonstrates irregularities, misrepresentations, fraud, or abuse in its operation.

§77.4 Remedial actions.

If, after the conclusion of the procedures set forth in §77.5 or 77.6 the Department finds that one or more of the conditions set forth in §77.3 is or has been present, the Department may take the following remedial actions against a recipient organization's use of its letter of credit.

(a) The Department may place special limits, restrictions, or controls upon the recipient organization's use of its letter of credit.

(b) The may require more frequent or more detailed reporting from the recipient organization.

(c) The Department may suspend, reduce, or terminate the recipient organization's use of its letter of credit.

§77.5 Remedial action procedures.

Except as provided in §77.6, the Department will use the following procedures whenever it seeks the remedial action specified in §77.4.

(a) Notice.-Prior to taking remedial action, the Department will provide the recipient organization written notice of its intended action setting forth both the legal and factual reasons therefor. Notice may be provided by certified or express mail, TWX, telegram, delivery, or similar means.

(b) Opportunity to respond.- (1) The recipient organization has 30 days after receipt of the notice in which to submit to the Department a written statement setting forth any legal and factual reasons why it believes the proposed remedial action would be inappropriate. If no response is received by the Department within the 30-day period, the Department may make the proposed remedial action effective immediately. If a response opposing the taking of remedial action is received from the recipient organization within the 30-day period, no remedial action will be taken until a final decision has been reached under paragraph (c) of this section. (2) The Department may prepare a written reply to the recipient organization's response. Any such reply will be forwarded to the deciding official together with the notice sent the recipient organization and the organization's response, and a copy of the reply will be served on the recipient organization.

(c) Departmental decision.-The Department's decision to take remedial action under this part will be made by an official of the Department who had no involvement with the initial determination to seek remedial action. The deciding official may affirm, reverse, or modify the initial determination. In making the decision, the official will consider only the notice provided by the Department recipient organization's statement, the Department's reply, together with any other documents attached to them and statements at any informal conference held pursuant to paragraph (d) of this section. The official's decision will be provided to the recipient organization in writing and will constitute the Departments final administrative action on the matter.

(d) Informal conference.- If, in the judgment of the official designated to make a final decision, it would materially enhance his ability to resolve the matters in dispute, he may convene an informal conference to question or hear an oral presentation by the parties. If an informal conference is convened it will be transcribed.

(e) Effect of decision.- The decision in a proceeding under this section affects only the recipient organization's obligations related to its letter of credit and does not determine the organization's ultimate liability with respect to improperly spent funds or other misconduct.

§77.6 Emergency procedures.

(a) Should the Department determine that it cannot adequately protect assets of the Federal government available to a recipient organization under its letter of credit without taking remedial action prior to the procedures specified in §77.5, it may immediately take remedial action subject to the subsequent completion of those procedures.

(b) Where the Department has taken remedial action as described in paragraph (a) of this section, it will notify the recipient organization orally of the remedial action within one business day of its imposition and in writing within seven business days of its imposition. The written notice will conform to that described in §77.5(a).

(c) After receipt of the written notice, the recipient organization will have the same opportunity to respond as described in §77.5(b)(1).

(d) The Department will issue a final decision in writing no later than twenty days following receipt of any response submitted by the recipient organization.

[FR Doc. 85-435 Filed 1-4-85; 8:45 am]


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