45 CFR §75.435 and 75.441 address the costs of these legal issues. The first is very detailed, so I am only going to touch on highlights. If you are working through this, your attorney will want to review the entire section. Much of this is quoted, but it is not complete. Your main requirement is that, if you are working on any issue of non-compliance with law or regulation, you want your attorney and accountant to help you assure that you are tracking the costs separately and not charging anything to your federal grant that is not allowed.
Costs incurred in connection with any criminal, civil or administrative proceeding (including filing of a false certification) commenced by the Federal Government, a state, local government, or foreign government, or joined by the Federal Government (including a proceeding under the False Claims Act), against the non-Federal entity, (or commenced by third parties or a current or former employee of the non-Federal entity who submits a whistleblower complaint of reprisal in accordance with 10 U.S.C. 2409 or 41 U.S.C. 4712), are not allowable.
Costs include the services of in-house or private counsel, accountants, consultants, or others engaged to assist the non-Federal entity before (including investigation expense), during, and after commencement of a judicial or administrative proceeding, that bear a direct relationship to the proceeding.
If a proceeding referred to above is commenced by the Federal Government and is resolved by consent or compromise pursuant to an agreement by the non-Federal entity and the Federal Government, then the costs incurred may be allowed to the extent specifically provided in that agreement.
Costs related to wrongdoing of anyone within your organization cannot be paid for through federal funds.
An authorized Federal official must determine the percentage of costs allowed considering the complexity of litigation, generally accepted principles governing the award of legal fees in civil actions involving the United States, and such other factors as may be appropriate. Such percentage typically must not exceed 80 percent.
Costs which may be unallowable under this section, including directly associated costs, must be segregated and accounted for separately. During the pendency of any proceeding covered by paragraphs (b) and (f) of this section, the Federal Government must generally withhold payment of such costs. However, if in its best interests, the Federal Government may provide for conditional payment upon provision of adequate security, or other adequate assurance, and agreement to repay all unallowable costs, plus interest, if the costs are subsequently determined to be unallowable.
Costs resulting from non-Federal entity violations of, alleged violations of, or failure to comply with, Federal, state, tribal, local or foreign laws and regulations are unallowable, except when incurred as a result of compliance with specific provisions of the Federal award, or with prior written approval of the HHS awarding agency.
Bottom line — if you or someone in your organization failed to uphold the requirements (law and regulation), then you cannot expect your federal grant to pay for the costs of investigation, defense, or any resulting fines or penalties. If you are able to settle, the settlement may include these costs.
There are a number of other costs addressed in the regulations. Ask about any of them here or contact my at email@example.com