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This Directive takes effect on June 2011.
Considerations during the transition from the Funding Arrangements: Intervention Policy, effective April 1, 2007 to the Default Prevention and Management Policy, effective June 2011, includes the following:
This directive applies to Aboriginal Affairs and Northern Development Canada (hereinafter referred to as the Department) officials managing transfer payments. This directive does not apply to funding provided under legislated self-government agreements and Funding Agreements resulting from federal-provincial accords.
(What is the Directive Designed to Achieve?)
This objective of this directive is to aid in the implementation of the Default Prevention and Management Policy (DPMP) through departmental processes which identify defaults. The DPMP mandates a risk based approach, which emphasizes Recipient responsibility and capacity, default prevention and the management of defaults to ensure Programs, projects and services are delivered and funds expended are in compliance with Treasury Board Authorities and the Financial Administration Act. The objective of the Policy on the Default Prevention and Management is:
The expected results of this directive are to:
(Why this Directive Matters?)
The Department, through ongoing review of information available about the Recipient's management of funding and through other strategies, will, to the extent possible, assist Recipients in their efforts to prevent the occurrence of circumstances that may give rise to defaults.
While the responsibility of default prevention, identification and remediation lies with the Recipient, the Department, through the use of departmental tools and resources and the processes which are outlined in this directive and the Third Party Funding Agreement Management Directive, will support the Recipient's efforts in initially preventing and subsequently, identifying and remediating their default in an appropriate, timely and cost effective manner.
There is greater emphasis in the Default Prevention and Management Policy on maintaining relationships with the Recipient, prevention, capacity development and sustainability. The following are important changes which provide for a more flexible and positive context:
|Funding Arrangements: Intervention Policy||Default Prevention and Management Policy (DPMP)|
|Recipient-managed in accordance with Remedial Management Plans (RMP)||Management Action Plans (MAP)|
|Co-management||Expert Resource Support|
|Third Party Management||Third Party Funding Agreement Manager (AANDC funded Program only)|
|Intervention imposed on the Recipient as whole entity||Default prevention and management may be targeted at a specific Program|
This directive is developed to work in synergy with other elements of AANDC Transfer Payments Policy Architecture and supports the objectives of the Treasury Board Secretariat (TBS) Policy on Transfer Payments (2008) and directive on Transfer Payments (2008) utilizing a risk management approach outlining some of the primary business processes by which:
This directive should be read in conjunction with the "default" and the "remedies on default" sections of the Funding Agreement.
The Directives on Financial Reporting (2011) and Reporting Management (2011) provide for monitoring by the Department of Recipient compliance to the financial and non-financial reporting requirements of the Funding Agreements. These directives provide for remedies to be applied in the event of non-compliance.
This directive provides for additional action(s) to be taken in the event a Recipient is in default of its Funding Agreement. In higher risk situations, the directive on Third Party Funding Agreement Management (2011) may also be applicable.
A Default Management User Guide (2011) and a Management Action Plan Workbook (2011) support implementation of this directive.
The Chief Financial Officer (CFO) has authority to issue this directive in support of the TBS Policy and Directive on Transfer Payments (2008), to amend or rescind this directive and to approve any exceptions to this directive that may be sought.
(How Will the Desired Directive Results be Achieved and Who Does What Under this Directive?)
In addition to the responsibilities assigned to responsible officials within the Default Prevention and Management Policy, the following duties are to be fulfilled by:
As a Chief Accounting Officer, Deputy Minister is responsible for:
The Chief Financial Officer (CFO), who through the Transfer Payment Centre of Expertise (TPCOE), is responsible to:
The Regional Operations Senior Assistant Deputy Minister is responsible for:
Assistant Deputy Ministers are accountable to the Deputy Minister for:
Regional and Headquarter (HQ) Director Generals with Program funding responsibilities are accountable to their Assistant Deputy Ministers for:
The Regional Operations Sector & Northern Affairs Organization, in supporting the consistent and cost-effective implementation of this Directive across regions are responsible to:
Regional Directors, Corporate Services in their arms-length oversight role with respect to regional operations are responsible to:
Regional Funding Services Officers (FSOs) or their equivalents who are the primary point of contact between AANDC and the Recipients assigned to them, are responsible to:
This is a structured approach which emphasizes prevention, Recipient capacity development and sustainability. When default management is required, the cooperation and capacity of the Recipient as well as specific principles contained in the Default Prevention and Management Policy must be considered:
Figure 1 — Templates of these working tools are available in electronic format from the Transfer Payments Directorate — Centre of Expertise.
The three pillars of the Default Prevention, Management and Sustainability Approach as displayed above are:
The operational requirements for each of these pillars will be the focus of the remainder of this directive. The Default Management User Guide and Management Action Plan Workbook will provide detailed guidelines and/or examples of:
Default prevention is an ongoing process that focuses on relationships with funding Recipients and is inherent in existing AANDC business processes. As noted in figure 1, this includes reporting; inclusive of review and follow-up,Footnote 1 the yearly audit review of Recipient audited financial statements and the General Assessment. In addition there should be ongoing monitoring including site visits by Funding Services Officers (FSO) and Program Officers (PO), Program compliance audits and investigation of complaints and allegations.
Information available from the past and these sources should be used to identify potential defaults and prevention opportunities as well as inform strategic investments in activities such as governance, financial and administrative capacity targeted at preventing defaults. Access to this funding requires a plan by the Recipient such as a plan developed under the Community Development Framework, a Management Development Plan or a similar plan which clearly identifies the potential benefits and need for the funding.
Maintaining a relationship with the Recipient allows FSOs and POs to identify areas of concern with respect to Recipient capacity and being proactive in preventing defaults. The FSOs and POs should be alert to one or more of the following indicators which increase the potential for defaults. This list should not limit FSOs and POs to consider other indicators:
Prevention relies on the willingness of the Recipient to work with departmental officials to address financial, administrative and capacity issues. When conditions exist that indicate the potential for default, there should be engagement with the Recipient to discuss departmental concerns. This may be informal through phone calls and meetings or more formal though observations made in the yearly audit review letter or written notifications of Program compliance audit results. The following activities should be undertaken when there is a risk that the Recipient would be moving into default of its Funding Agreement:
If prevention activities are unsuccessful in preventing a default the Prevention, Management and Sustainability Approach moves to pillar 2 — Default Management.
Defaults may be identified through the department's structured business processes (e.g., compliance regimes) or through less structured means (e.g., observations made during field visits). First Nations and Inuit Transfer Payment (FNITP) System provides protocols for capturing, storing and accessing both types of default information.
Funding Services Officers (or equivalent) monitor the default information provided by Program and compliance managers. When problematic trends are observed, they may contact the Recipient to confirm the situation and encourage the Recipient to rectify the default(s). Such (informal) action may be justified as appropriate, where two or more of the following are known to be true:
Steps taken to contact the Recipient to confirm the situation and a decision not to initiate formal action through a Default Assessment will be noted to file.
Where the Funding Services Officer (or equivalent) in monitoring default information, observes problematic trends, steps will be taken to initiate a Default Assessment where:
Under the direction of the FSO or responsible official, a default assessment may be deemed necessary. He/she may update the Recipient's General Assessment, as a first step in initiating a Default Assessment, for the purpose of presenting to approval authorities, the range of potential issues that may impact delivery of AANDC funded Programs, services, activities and projects. Changes to the Recipient's GA risk profile may also result.
The Default Management is a structured business process used to identify defaults and then determine the most timely, least intrusive and most cost effective method of remedying a default. The risk based approach of the new policy on Default Prevention and Management is less prescriptive than the previous Funding Arrangements: Intervention Policy and it can be utilized for innovative approaches to remedying a default.
There are a wide range of actions available to the department, and must be necessary, progressive, reasonable in the circumstances and must be communicated to the Recipient without limiting any remedy or other action Canada may take under the Agreement. The actions taken must be well documented and need to be based on documented fact and not conjecture.
The legal underpinnings of default management activities are contained within the text of the Funding Agreement. The range of default remedies available to the Department are also defined in the agreement and have been agreed to by the Recipient when they signed the agreement.
A default, as specified in the Funding Agreement, is the occurrence of any of the following circumstances:
The Default Assessment is a structured business process used to determine, for a Recipient in a default situation:
The Default Assessment is completed in accordance with the DM User Guide, workbooks, formats and instructions issued by the Chief Financial Officer.
The overall default management risk rating classifies Recipients as having a "low", "medium" or "high" risk profile. Based on the Recipient's risk rating, the appropriate delegated authority, as outlined in the table below, is provided the DA and recommended DM action(s) for review. Such actions may or may not be accepted by the delegated authority, who may choose to provide alternatives.
|Overall Risk Level||Multi-Program (Ongoing) Recipient||Project and Specific Agreement Recipient||Approval|
|Low Risk||Monitored Self Correction (e.g: Ninety Day Plan for corrective strategies)||Monitored Self Correction (e.g: Ninety Day Plan for corrective strategies)||Funding Services Manager or equivalent with notification to Regional TPMC|
|Medium Risk||Management Action Plan — Expert Resource Support||Management Action Plan — Expert Resource Support||Regional TPMC|
|High Risk||Third Party Funding Agreement Management||Terminate Agreement||Program/Regional Director General|
Risk to service population as outlined in the DM User Guide is determined in consideration of the actual or potential consequences of a default situation; and the degree of urgency associated with correcting the defaults.
Information about the Recipient is compared to the risk to service population "considerations" or sources of risk as outlined in the DM User Guide, to determine a risk score for each deault. The risk scores are used to prioritize corrective action. The "cumulative score for all defaults" is used to classify the overall risk to service population risk rating as being low, medium or high.
Information about the Recipient is compared to the risk to remediation "considerations" as outlined in the DM User Guide to determine a low, medium or high risk to remediation rating.
The overall default management risk rating which is based upon the risk to service population and risk to remediation is determined by applying the table 1 presented in the DM User Guide — Annex: Determining Default Management Action.
A default management action is determined in proportion to the overall default management risk rating. This rating may be supplemented by the judgement of the responsible officer, who will draw upon information which may be available.
Thereafter, the responsible officer will recommend a default management action. If the recommendation differs from that generated by Default Management Assessment contained in the DM User Guide, a rationale will be provided.
There are five principal Default Management actions listed in ascending order of risk to be managed and are subject to the following evaluation cycles to determine if the required results are being achieved:
The principal default management action(s) may or may not be applied sequentially and do not preclude the responsible officer from initiating other default actions contemplated in the Funding Agreement. This provides a level of flexibility in order to take other reasonable actions that are not specified in the agreement. A Ninety Day Plan (NPD) is an example of such measure, or making direct payment to a contractor for the completion of a critical capital project such as a water treatment plant when the Recipient defaults on payment. Default actions are applied based upon the overall default management risk rating determined through the default assessment process and accepted by the Responsible official with delegated authority (see Exhibit 1). The principal default management action may be amended upon the approval of the delegated authority in consideration of progress being made by the Recipient in remedying their default(s); and as supported by an update of the default assessment.
|Principal Default Management Action||Recommended by||Accepted by|
|Initiate monitored self correction (e.g: Ninety Day Plan)||FSO (or equivalent)||FSO Manager with notification to Regional TPMC|
|Withhold funds intended for services, deemed by the Responsible officer, as non essential||FSO (or equivalent)||FSO Manager|
|Require Management Action Plan (MAP)||FSO Manager||TPMC|
|Appoint Third Party Funding Agreement Manager||TPMC||Program/Regional Director General|
|Terminate agreement||TPMC||Program/Regional Director General|
There are four potential outcomes of the default management action evaluation process:
Where the overall default management risk rating is low and the Recipient is deemed capable of remedying the default(s) within approximately 90 days, on approval of the Funding Services Manager or equivalent, the Responsible Official will communicate to the Recipient:
Expert resource support can be implemented for a single or multiple Programs or be applied to all AANDC funded Programs and core administration. Expert resource support is used when the Recipient is willing but lacks the capacity to remedy a default. A Financial Manager who also exercises signing authority like that of a co-manager remains as an option under the Default Prevention and Management Policy. As funding for expert resource support is not provided by the department, a Management Action Plan should be considered prior to requiring expert resource support.
Within the corrective strategy, the Recipient will be required to set out in the format of its choice, by default or groupings of common defaults, the action to be taken and by whom within the 90 day timeframe. The Responsible Official will approach the Recipient to formulate mutually agreed upon benchmarks and will subsequently monitor progress against such benchmarks. The corrective strategy is not incorporated in the Funding Agreement as an amendment.
Within the corrective strategy framework, the Responsible Official will notify the Recipient of the requirement to prepare a Management Action Plan if any or all of the following occur:
Once a default has been identified, the appropriate Responsible official may withhold funds deemed by the Responsible Official as intended for non essential services. Such funds would have otherwise been payable under a Funding Agreement.
Other Departmental directives authorize the withholding of funds without the undertaking of a formal default assessment process.
Where the overall default management risk rating is medium and upon acceptance by the Transfer Payment Management Committee (TPMC), the Department will notify, in writing, the Recipient of the requirement to prepare a Management Action Plan (MAP). This is the least intrusive form of default management.
MAPs will be added to the existing Funding Agreement via an amendment with assigned data collection Instruments (DCI) for quarterly reporting requirements applying the templates outlined in the DM User Guide. Funds will be held under the Management Control Framework (MCF) if quarterly updates are not adhered to by the Recipient.
A self managed Management Action Plan (MAP) is used when the Recipient is willing and has the capacity to remedy the default. This is a Recipient lead activity that must be acceptable to the Department.
The following principles apply in defining MAP requirements:
This is the most costly and intrusive form of default management and should be used as a last resort to ensure the continued delivery of Programs and services to community members. The Responsible Official will, upon approval of the Region/Program Head, notify the First Nation or Tribal Council of the appointment of a Third Party Funding Agreement Manager if any or all of the following are deemed occur:
See the Directive on Third Party Funding Agreement Management (2011).
Where the Overall DM Risk Rating is high and upon approval of the Region/Program Head, the Responsible Official will notify the Recipient, in writing, that the agreement will be terminated and the reasons for its termination.
The Responsible Official may give the Recipient up to 14 days from the time the Recipient receives the Notice issued by the Department to provide information which would indicate that a default has not occurred or has already been remedied — except where the delegated authority determines that urgent health and safety issues demand immediate action. This option is usually applied for Recipient other than First Nations.
Upon termination, the Department will:
Recipients often emerge from a successful Default Prevention, Management and Sustainability Approach process with increased capacity and a solid foundation for future success. The significant work completed by the Recipient as well as the FSO and POs can be utilized to achieve the vision of Leadership and move toward progressively greater independence and a sustainable well functioning community.
The Department's Community Development Framework is an excellent way to plan for and develop community capacity. In addition, Recipients should be referred to Aboriginal Organizations that support First Nations in developing their financial, administrative and management capacity. Two such organizations are:
In addition, Tribal Councils are funded by AANDC under the Tribal Council Funding Program Policy. They are mandated to provide specific advisory services and are responsible to their member Nations for helping develop capacity. High functioning Nations are often willing to share best practices including copies of constitutions, financial and administrative bylaws and policies.
It should be noted the policies, processes and procedures developed with funding support from the Professional and Institutional Development Program are shareable with other Recipients.
Where defaults arise when a Recipient is in a state of local emergency as declared by the responsible federal, provincial or territorial authority, the Department's response to the situation will be informed by the direction set by the responsible authority. The objective is to support a coordinated, effective response to the emergency situation.
The Program/Regional Director General may direct that the Default Identification and Default Management processes be expedited, where it is evident that an urgent response is required to manage the risk of severe negative impacts.
Additional oversight and controls support due diligence and are in place to ensure enforcement of this directive through the following activities:
AANDC will, to the extent possible, support the development of staff skills in order to meet organizational requirements including:
Oversight of the operation of the transfer payment management control framework and transaction processing by the Chief Financial Officer and Audit and Evaluation Services.
FNITP provides performance indicators for review/evaluation of this directive including:
Engagement of the Recipient in default situations including:
(What Happens when Significant Issues Arise Under this Directive?)
The consequences of non-compliance with this Directive are set out in section 6 of the Policy on Default Prevention and Management (2011).
For enquiries and interpretations please contact the department's Transfer Payments Centre of Expertise:
First Nations and Inuit Transfer Payment (FNITP) System: Is a web-enabled system that automates AANDC's transfer payment business processes, manages Funding Agreement information, and provides on-line access for First Nations and other funding Recipients.
Funding Agreement: Is a written agreement or documentation constituting an agreement between the Government of Canada and an applicant or a Recipient setting out the obligations or understandings of both with respect to one or more transfer payments.
General Assessment (GA): a standardized process for assessing a Recipient for the purpose of identifying potential issues that may impact delivery of AANDC funded Programs and services; and for adjusting administrative requirements in proportion to that risk, such that the Funding Agreement is managed within AANDC's risk tolerance.
Management Action Plan (MAP): Is the primary plan, developed by the Recipient, to remedy and recover from the default, to address its causes and prevent its recurrence. The MAP is also used to identify capacity gaps and resources available for successful implementation.
Program: Is a group of related activities that are designed and managed to meet a specific public need and are often treated as a budgetary unit. A Program can be a project or a service.
Recipient: Is an individual or entity that either has been authorized to receive a transfer payment or that has received that transfer payment.
Third Party Funding Agreement Management: Is a principal default management action applied by the Department in high risk situations, whereby the Department appoints a Third Party Funding Agreement Manager to manage a Recipient's Funding Agreement for a period during of time which the Recipient works to remedy the underlying causes of the default and reassume responsibility for the Funding Agreement.
Transfer Payment Management Committee (TPMC): Is a committee established within a region or sector, with governance responsibilities, to oversee the default assessment process, to approve draft default assessment reports and accept the Management Action Plan(s), MAP(s), within their area of responsibility.