Can a foundation recoup grant funds from a grantee?

Yes, but it is important to have in place a signed grant agreement with language that outlines what would happen if the grant is misused or not used according to plan.

From the Chronicle of Philanthropy:

Private foundations have a legal obligation to try to recover money that they believe has been misused, and publicly supported charities that make grants are legally required to make sure their money is used for charitable purposes, so you are dealing with a serious issue, says Marc Owens, a lawyer in Washington who spent a decade overseeing the tax-exempt division of the Internal Revenue Service.

“The first step is to find out what happened,” says Mr. Owens. Start with a letter that requests that the grantee correct the situation. “In some cases, it’s more appropriate to change something than it would be to repay the money to the grantor,” he says. Grantees often take steps to make sure they comply with the terms of the grant, he says: “In most cases, grantees want more money so they’re willing to comply. The dynamic is usually all about making the grantor happy.”

If you’re still not satisfied, you can send a letter requesting the grant recipient to pay the money back. You might want to bring your lawyer into the loop at this point.

Keep in mind, though, that the legal requirement to make a reasonable effort to recover misused funds does not amount to a legal requirement to sue an organization to recover the funds. “It’s a judgment call, based on the size of a grant, how egregious the diversion was, and whether there is a real capability of there being repayment,” says Mr. Owens.”

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