Conflicts of Interest: Disclosure Before the Expense Becomes a Grant Problem

A related-party transaction is not something to explain after the grant has already paid for it. Disclosure and proper handling should happen before approving the transaction.

Organizations receiving federal funding are responsible for more than determining whether an expense fits within the grant budget. They must also consider who benefits from the transaction, who participated in the decision, whether a conflict exists, and whether the organization followed the appropriate disclosure and procurement requirements.

This matters because an otherwise legitimate business expense can create a compliance issue if an organization does not properly disclose or manage a conflict of interest.

A practical rule of thumb: Grant requirements vary by funding source, federal agency, pass-through entity, and the specific terms and conditions of the award. Even so, maintaining financial policies, procurement practices, documentation, and internal controls that are generally aligned with 2 CFR Part 200 provides a strong compliance framework for organizations managing federal awards. The specific award and applicable agency or pass-through requirements should always be reviewed because they may impose additional or more specific requirements.

What 2 CFR Part 200 Requires

Under 2 CFR § 200.112 — Conflict of interest, recipients and subrecipients must disclose in writing any potential conflict of interest to the federal agency or pass-through entity in accordance with the applicable federal agency's conflict-of-interest policy.

Procurement rules go further. Under 2 CFR § 200.318(c) — General procurement standards, recipients and subrecipients subject to those procurement standards must maintain written standards of conduct covering conflicts of interest for employees involved in selecting, awarding, or administering contracts. An employee, officer, agent, or board member with a real or apparent conflict may not participate in the selection, award, or administration of a federally supported contract.

The regulation addresses situations in which the individual, an immediate family member, a partner, or certain related organizations has a financial or other interest in a company being considered for a contract.

Consider This Example

A nonprofit needs marketing services for a federally funded program. The executive director's sibling owns a marketing company.

The company may provide excellent services. Its price may even be competitive. But those facts alone do not resolve the conflict-of-interest issue.

Before charging federal grant funds, the organization should identify the relationship, review its conflict-of-interest and procurement policies, determine the applicable award and agency requirements, document the disclosure, remove the conflicted individual from the decision where required, and properly document the procurement and approval process.

The relationship itself should not be discovered during an audit, monitoring review, or expenditure examination.

Disclosure Is Financial Control

Organizations sometimes treat conflict-of-interest forms as annual governance paperwork. For grant-funded organizations, that is too narrow. Integrate conflict disclosure into the financial approval process.

Before approving a grant-funded purchase, contract, reimbursement, or other transaction, the organization should be able to answer:

• Does anyone involved in this transaction have a financial, family, business, employment, or other relationship with the vendor or recipient?
• Has that relationship been disclosed?
• Does the organization's written conflict-of-interest policy address the situation?
• Does the award, pass-through entity, or federal agency impose additional disclosure requirements?
• Has the conflicted individual been removed from the selection or approval process when required?
• Was the procurement process properly documented?
• Is the price reasonable?
• Is there sufficient documentation to demonstrate why the transaction was appropriate?

Under 2 CFR § 200.403 — Factors affecting allowability of costs, costs charged to a federal award generally must be necessary and reasonable, allocable to the award, consistent with applicable policies, treated consistently, and adequately documented, among other requirements.

For grant purposes, the compliance file needs to tell the entire story.

Disclosure Does Not Automatically Make a Cost Allowable

This distinction is critical. Disclosing a potential conflict does not automatically make the underlying expense allowable. Disclosure addresses the conflict. The transaction must still satisfy the applicable procurement requirements, award terms, organizational policies, cost principles, and any required approvals.

Likewise, having an invoice and proof of payment does not establish that a cost is allowable.

The question is not simply: “Did we spend the money?”

It is: “Can we demonstrate that the organization was permitted to spend the money this way?”

Why This Matters for Disallowed Costs

2 CFR Part 200 defines a disallowed cost as a charge to a federal award that the federal agency or pass-through entity determines to be unallowable under applicable federal statutes, regulations, Part 200, or the terms and conditions of the award.

An undisclosed or improperly managed conflict does not automatically make every related expense disallowed. It can, however, create procurement, allowability, documentation, award-term, or other compliance deficiencies that may result in questioned or disallowed costs.

A transaction may begin as an ordinary purchase and later become a compliance problem when reviewers determine that required procedures were not followed or sufficient documentation does not exist to support the charge. By the time the transaction appears in an audit sample or monitoring review, the organization may be trying to reconstruct a process that should have been documented months earlier.

Prevention is much easier than reconstruction.

Don't Confuse a Potential Conflict With Fraud

Not every conflict of interest means misconduct occurred. A potential or apparent conflict can exist even when everyone involved believes the transaction is in the organization's best interest. That is precisely why disclosure and independent review matter: they allow the organization to address the relationship transparently before it compromises—or appears to compromise—the decision-making process.

There is, however, a separate and more serious disclosure requirement. Under 2 CFR § 200.113 — Mandatory disclosures, an applicant, recipient, or subrecipient must promptly make specified written disclosures when it has credible evidence, in connection with a federal award, of certain violations of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations, or a violation of the civil False Claims Act.

Organizations should distinguish between routine conflict disclosure and management and circumstances that may trigger mandatory disclosure requirements.

A Better Practice: Build Disclosure Into the Transaction

Vendor setup. Ask whether the vendor has a relationship with an employee, officer, board member, agent, or other decision-maker.

Purchase approvals. Include a conflict-of-interest certification or disclosure question.

Procurement documentation. Record who participated in vendor selection and whether anyone recused themselves.

Board approvals. Document disclosures, recusals, deliberations, and approvals when board-level related-party matters arise.

Grant expenditure review. Flag related-party transactions for additional review before they are charged to an award.

Annual disclosures. Require periodic conflict-of-interest statements, but don't rely on the annual form alone. Relationships and circumstances can change during the year.

The objective isn't to create more paperwork. It is to create the documentation before someone asks for it.

The Quantum Leap Takeaway

When federal grant funds are involved, transparency is part of financial management. Identifying a conflict early allows you to evaluate, disclose, document, and manage it. A conflict discovered after the expenditure has already been charged to the grant can become a much more difficult compliance issue. As a general operating practice, organizations managing federal awards should keep their grant financial management framework aligned with 2 CFR Part 200 while also checking each award's requirements.

Before approving a transaction involving a related party or potential conflict, ask:

• Has the relationship been disclosed?
• Has the conflicted person been removed from the decision where required?
• Did we follow our procurement and conflict-of-interest policies?
• Does the award or funding agency require additional disclosure or approval?
• Would our documentation make sense to someone reviewing this transaction two years from now?

If the organization cannot answer those questions confidently, the transaction may not be ready to charge to the grant.

Clear documentation today can prevent disallowed costs tomorrow.

Bold Moves. Clear Numbers. Strategic Growth.