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Yes, your nephew has to be declared to be the biological father before any support is ordered. Often the child support enforcement unit does it and orders support all at the same time. Another thing that happends is that, somehow, the Petition to Establish paternity magically does not get delivered to the alleged father.
As to the second part of your question, he actually cannot be sure where the money is going, but he should get visitation as soon as possible and make sure that he is in her life all the time. That is probably the best way to "oversee" the safety and health of the little girl. The child support enforcement does not usually assist a person with getting visitation ordered, however.
Your nephew should demand a DNA test right away and ask for a copy of the entire file. He should then ask for a continuance until the DNA results come back. It probably will be all right. If the mother and grandmother have a private attorney, instead of the chld support enforcement, then your nephew definitley must have an attorney for his own good. Good luck to your family.