It is shocking that anyone would think to steal from the one of the most tightly regulated—and publicly disclosed—bank accounts in the United States. And yet political committees, flush with cash and often poorly supervised by their connected organizations, candidates, or boards, are the repeated targets of fraud and embezzlement.
Sadly, embezzlement may be one of the few things that cuts across party lines these days.
In early September, a campaign treasurer for dozens of state and federal Democratic candidates in California was arrested on federal fraud charges. The treasurer is accused of taking over $675,000 from the campaigns for personal expenses (and payroll for her staff that was not authorized by her clients). A week later the former treasurer for a Republican Member of Congress was sentenced to 30 months in prison after he pleaded guilty to embezzling more than $450,000 from the campaign accounts over a period of 15 years.
This follows the guilty plea and prison sentence for the former treasurer of the NRCC—who was also treasurer for a number of Republican candidates—who embezzled over $840,000. Then there was the three-year sentence for a House Republican campaign manager who embezzled more than $250,000 in campaign funds over a four-year period.
Parties and candidates are not the only victims. A major defense contractor also suffered theft. All of these headlines have a common theme: lack of oversight or controls for the PAC.
Part of the explanation for the abuses is that candidates, parties, and PACs often consolidate all of their financial functions—treasurer, check signing authority, auditing, acceptance of contributions and reporting—in one person as a way to streamline their operations and increase efficiency. The results, however, can be disastrous as Republicans, Democrats, and corporations have all discovered.
The FEC offers candidates, PACs, and parties (which we will refer to collectively as “committees”) suggestions for dealing with these problems. Many associations and corporations are more familiar with recommendations for dividing control and reporting of the money, but candidates and parties have a harder time.
There are six simple steps your PAC can take to implement financial controls without impeding a committee’s ability to move as quickly and efficiently as is needed during a campaign.
Back in 2007, the Federal Election Commission recognized that PACs could fall victim to fraud yet still be subject to fines for misrepresenting their finances on their FEC reports. So the commission issues a statement of policy intended to create a safe harbor: if a set of basic internal controls are in place at the time of a “misappropriation,” and if an association promptly notifies the FEC of the incident, the FEC will not penalize the association for failing to file accurate reports.
These recommendations aren’t expensive and they’re likely not extensively different from measures that are probably already in place to protect the association's other accounts, but they are key in safeguarding a committee’s funds.
1. Divide committee Responsibilities: Basic committee management involves at least three different jobs. First, you need one person to handle the committee's internal bookkeeping as the committee receives and distributes contributions. Second, you need someone with the authority to deposit and withdraw funds from the committee's bank accounts. And third, you need someone to perform routine audits of both the books and the bank accounts before filing disclosure reports with the FEC.
How do some committees find themselves in trouble? They hire one individual to perform all three tasks.
Separating these responsibilities is crucial to protecting a political committee. An employee with the authority to withdraw large sums of money from a bank account should not also be responsible for reconciling monthly bank statements to internal books. Similarly, an employee asked to monitor incoming contributions should not also be asked to manage the committee’s accounting records. When no single individual has total control over the finances of the committee, its security increases dramatically.
2. Regularly Reconcile the Records: A committee should review its monthly bank statements and reconcile each transaction to the committee’s internal records. Again, this task should not be assigned to any employee also designated to sign checks or monitor bank accounts. Prior to filing any report with the FEC, a committee should also square its banking and accounting records with any information it has provided on the form. The FEC has suggested that this one step would have either prevented or quickly uncovered most of the misappropriations it has investigated in recent years. It is also an excellent technique for discovering accidental errors and omissions in disclosures that are made available to the public and subject to penalties for inaccuracy.
3. Limit Access to Cash and Checks: Committees should limit the number of persons authorized to sign checks, and any expenditure in excess of $1000 should require the signature of two responsible individuals. Because a parent association can spend its own funds to cover PAC operating expenses, most PACs have little need for debit or credit cards. When they are necessary, it is often possible to place both per transaction and cumulative limits on these cards until individual expenditures have been independently approved. The FEC recommends that any committee with a petty cash fund use an Imprest system and keep no more than $500 in circulation.
4. Find the Right People for the Job: Although committees may use member volunteers to raise the profile of the PAC, the accounting functions should be assigned to employees who are trained in their responsibilities. Many qualified third party vendors are also available to provide auditing services and to prepare FEC disclosure forms. Generally speaking, third party involvement in committee finances should be limited to these roles. When outside vendors are given access to the bank, there is a greater risk of mischief. In addition, the committee’s treasurer should carefully review and approve the reports before they are filed.
5. Keep Accounts in the committee's Name: Every committee should have an employer identification number (“EIN”) issued to it by the Internal Revenue Service. All committee bank accounts should be held in the committee’s name and with that EIN. Committee leadership should never approve of opening an account in the name of an individual, or use an individual's Social Security Number for account identification. Only the committee treasurer or his or her designee should have the authority to open and close accounts, and the committee should receive all of its bank statements, unopened, at its primary business address.
6. Document the Controls: After implementing a system, the committee should document the policies and procedures as contemporaneous evidence of the system. Just as no one set of internal governance procedures is right for every association, no one set of internal controls is right for all political committees. But absent a straightforward arrangement of checks and balances, a political action committee is almost certainly left exposed. These basic safeguards should help an association to protect its assets and comply with FEC disclosure requirements.
Ronald M. Jacobs is a Government Affairs partner at Venable LLP. He advises clients on all aspects of state and federal political law, including campaign finance, lobbying disclosure, gift and ethics rules, pay-to-play laws, and tax implications of political activities. He can be reached at RMJacobs@venable.com. Maura Marcheski is an associate with Venable LLP’s Regulatory Group. She assists clients on a variety of regulatory compliance matters before federal agencies.