FEDERAL ELECTION COMMISSION

WASHINGTON, D.C. 20463

December 27, 1999

MEMORANDUM

•

TO:

FROM:

SUBJECT:

RON M. HARRIS

PRESS OFFICER

PRESS OFFICE 11/1 . ROBERTI. COSTA f~Y~ ASSISTANT STAFF DIRECTOR

AUDIT DIVISION

PUBLIC ISSUANCE OF THE FINAL AUDIT REPORT ON

THE VICTORY '96 JOINT FUNDRAISING ACTIVITIES HELD

ON BEHALF OF THE DEMOCRATIC NATIONAL COMMITTEE

AND CLINTON/GORE '96 GENERAL ELECTION LEGAL

AND ACCOUNTING COMPLIANCE FUND

Attached please find a copy ofthe final audit report and related documents on The Victory '96

Joint Fundraising Activities Held on Behalf of the Democratic National Committee and Clinton/Gore '96

General Election Legal and Accounting Compliance Fund which was approved by the Commission on

December 9, 1999.

Informational copies of the report have been received by all parties involved and the report may

be released to the public.

Attachment as stated

cc: Office of General Counsel

/Office of Public Disclosure

Reports Analysis Division

FECLibrary
•

REPORT OF THE AUDIT DIVISION

ON

THE VICTORY '96 JOINT FUNDRAISING ACTIVITIES HELD ON BEHALF OF THE

DEMOCRATIC NATIONAL COMMITTEE AND CLINTON/GORE '96 GENERAL ELECTION

LEGAL AND ACCOUNTING COMPLIANCE FUND

Approved December 9,1999

FEDERAL ELECTION COMMISSION

999 E STREET, N.W.

WASHINGTON, D.C.
TABLE OF CONTENTS

THE VICTORY '96 JOINT FUNDRAISING ACTIVITIES HELD ON

BEHALF OF THE DEMOCRATIC NATIONAL COMMITTEE

AND CLINTON/GORE '96 GENERAL ELECTION LEGAL &

ACCOUNTING COMPLIANCE FUND

PAGE

Executive Summary

•

•

Audit Report

Background

Findings

Legal Analysis

Transmittal to Committee

Chronology

3

3

5

13

17

19
FEDERAL ELECTION COMMISSION

Washington, DC 20463

THE VICTORY '96 JOINT FUNDRAISING ACTIVITIES HELD ON

BEHALF OF THE DEMOCRATIC NATIONAL COMMITTEE

AND CLINTON/GORE '96 GENERAL ELECTION LEGAL &

ACCOUNTING COMPLIANCE FUND

EXECUTIYk SUMMARY

An audit was perfornled ofthe Victory '96 joint fundraising activities (Victory

'96) which had as fundraising participants the Democratic National Committee (DNC)

and the Clinton/Gore '96 General Election Legal & Accounting Compliance Fund

(GELAC). The audit was conducted pursuant to 26 U.S.C. §9007(a) which requires the

Commission to audit committees authorized by candidates of each political party for

President and Vice-President who receive Federal Funds.

The findings ofthe audit were presented to the Committee at an exit conference

held on June 25,1999, and in the Exit Conference Memorandum (ECM). The relevant

parts ofthe Committee's response to those findings are included in this audit report.

The following is an overview ofthe findings contained in the audit report.

Receipt ofApparent Prohibited Contributions from Possible Foreign Nationals

and an Incorporated Entitv- 2 U.S.C. §§441(e), 441b(a) and 11 CFR §103.3(b).

The audit questioned 26 contributions, totaling $90,000, as possibly coming from

prohibited sources. According to the contribution records, the "DNC Contact" was John

Huang for 25 ofthe 26 items, the "Solicitor" was Charlie Trie for six ofthe 26 items and

one ofthe 26 items was from Maria Hsia. Messrs. Huang and Trie were indicted on

violations of campaign finance laws relative to funneling foreign national contributions to

the DNC and other Democratic committees relative to the 1996 elections. Ms. Hsia was

indicted on federal charges oflaundering contributions from an incorporated Buddhist

temple in California to Democratic committees relative to the 1996 elections. Four ofthe

26 items, totaling $30,500 were determined to be from permissible sources and one item,

in the amount of$10,000, was determined to have been refunded timely. Ofthe

remaining 21 items, totaling $49,500, six, totaling $24,900, were refunded to the

contributors (one refund in the amount of$900 related to a $1,000 contribution) and

another item, in the amount of$10,000, was forwarded to the U.S. Treasury - the action

relative to these seven items was untimely. No information was available nor was any

apparent action taken relative to the remaining $14,600 ($49,500 - $24,900 -$10,000).

Page 1 of 20 Approved 12/09/99
2

DNC Counsel stated that they had complied with 11 CFR §103.3(b) with respect

to the contributions in question because they had conducted an intemal review with the

assistance ofoutside counsel and a public accounting firm when questions were raised in

October and November of 1996.

Reporting of Receipts and Disbursements as Memo Entries - 11 CFR

§§ 102.17(c)(8) and 103.3(b)(3). The DNC, as the fundraising representative for the

Victory '96 joint fundraising activities, only itemized the "federal" portions of

contributions and did not report the "non-federal" portions, totaling $450,926, as memo

entries pursuant to II CFR §102. 17(8)(i)(A). The following should also have been

disclosed as memo entries: the distribution ofjoint fundraising proceeds to the DNC,

totaling $1,166,737; a $250,000 transfer for start-up costs from the DNC to Victory '96;

and, the return ofthe $250,000 to the DNC. DNC Counsel disagreed that they were

required to disclose memo entries relative to these transactions, however, they filed

amended schedules which COlTected the public record.

Disclosure of OccupationlName of Employer - 2 U.S.C. §§434(b)(3)(A),

431(13)(A), 432(i) and 11 CFR §104.7(b). The Committee did not disclose the donor's

occupation/name of employer for a material number ofitemized contributions. The Audit

staff located approximately 77% ofthe missing information in the contribution records.

In response to the ECM, the Committee filed amended Schedules A (Itemized Receipts),

however, the minimum requirements for reporting this infomlatioll was still not met for a

material number of reported entries.

Disclosure of Debts and Obligations - 2 U.S.C. §434(b)(8) and 11 CFR

§104.11 (a). The Audit staffidentified debts owed by Victory '96, totaling $332,573,

which were not disclosed on Schedules D (Debts and Obligations) as required. In

response to the ECM, the Committee filed amended Schedules D which included some of

the debts not previously disclosed. For the remaining debt errors, DNC Counsel asserted

that these items were included within the larger debt balances already disclosed on

Schedules D.

Page 2 of 20 Approved 12/09199
FEDERAL ELECTION COMMISSION

WASHINGTON, O.C 204&3

REPORT OF THE AUDIT DIVISION

ON

THE VICTORY '96 JOINT FUNDRAISING ACTIVITIES HELD ON

BEHALF OF THE DEMOCRATICNATIONAL COMMITTEE

AND CLINTON/GORE '96 GENERAL ELECTIONLEGAL &

ACCOUNTING COMPLIANCE FUND

I. BACKGROUND

A. AUDIT AUTHORITY

This report is based on an audit ofthe Victory '96 joint fundraising activities

(Victory '96) which had as fundraising participants the Democratic National Committee

(DNC) and the Clinton/Gore '96 General Election Legal & Accounting Compliance Fund

(GELAC). Pursuant to II CFR §I02.17(b)(2), these two committees agreed that the DNC

would act as the fundraising representative. The Audit staffreviewed the activities relative to

certain events and telemarketing projects. The audit was mandated by Section 9007(a) of

Title 26 ofthe United States Code which states that "[a]fter each presidential election, the

Commission shall conduct a thorough examination and audit ofthe qualified campaign

expenses ofthe candidates of each political party for President and Vice-President."

Also, Section 9009(b) ofTitle 26 ofthe United States Code states, in part, that

the Commission may conduct other examinations and audits as it deems necessary to carry

out the functions and duties imposed on it by this chapter. The audit further seeks to

determine ifthe activities materially complied with the limitations, prohibitions, and

disclosure requirements ofthe Federal Election Campaign Act of 1971 (FECA), as amended.

B. AUDIT COVERAGE

The audit ofthese joint fundraising activities covered the period from the

initial deposit on August 5, 1996 ~hrough the final transfer ofproceeds on June 9, 1997. The

DNC, as the fundraising representative, disclosed the Victory '96 financial activity with its

DNC activity, identifying it as "Victory '96." The net proceeds distributed as a result of

these joint fundraising activities totaled approximately $1.2 million to the DNC and $332,000

to the GELAC.

Page 3 of 20 Approved 12/09/99
2

C. CAMPAIGN ORGANIZATION

The two fundraising participants, the DNC and GELAC, both maintain

headquarters in Washington, DC. The Treasurers ofthe DNC during the period covered by

the audit were Mr. R. Scott Pastrick from August 5, 1996 through January 28, 1997 and Ms.

Carol Pensky from January 29, 1997 through June 9, 1997. The current DNC Treasurer is

Mr. Andrew Tobias. The Treasurer of GELAC is Ms. Joan Pollitt, who was also the

Treasurer during the period covered by the audit.

Victory '96 utilized two bank accounts for these joint iundraising activities.

The one held at NationsBank was entitled "DNC Services Corporation Victory '96 Federal"

and will be referred to as "Victory '96 Federal" in this document. This account was

maintained by the DNC. The other account held at Boatmen's National Bank ofArkansas

was entitled "Victory '96/Democratic National 'Committee - Telemarketing Account" and

will be refelTed to as "Victory '96 Telemarketing." This account was maintained by the

GELAC.

D. AUDIT SCOPE AND PROCEDURES

The audit included testing of the following general categories:

1. The receipt of contributions from prohibited sources, such as those

from corporations, labor organizations and foreign nationals (see

Finding II.A.);

2. The receipt of contributions or loans in excess of the statutory

limitations;

3. Proper disclosure of contributions from individuals, political

committees and other entities, to include the itemization of

contributions when required, as well as the completeness and accuracy

ofthe information disclosed (see Findings II.B. and C.);

4. Proper disclosure of disbursements including the itemization of

disbursements when required, as well as the completeness and

accuracy ofthe information disclosed (see Finding II.B.);

5. Proper disclosure of committee debts and obligations (see Finding

II.D.);

6. The accuracy oftotal reported receipts, disbursements and cash

balances as compared to committee bank records;

7. Adequate recordkeeping ofcomrnittee transactions;

Page 4 of 20 Approved 12/09/99
3

8. Proper reporting and funding of allocable expenses and distribution of

net proceeds;

9. Other audit procedures that were deemed necessary in the situation.

As part ofthe Commission's standard audit process, an inventory of campaign

records is conducted prior to the audit fieldwork. This inventory is conducted to determine if

the auditee's records are materially complete and in an auditable state. Based on our review

ofrecords presented, it was concluded that the records were materially complete and

fieldwork began immediately.

Unless specifically discussed below, no material non-compliance with statutory or

regulatory requirements was detected. It should be noted that the Commission may pursue

further any ofthe matters discussed in this report in an enforcement action.

II. AUDIT FINDINGS AND RECOMMENDATIONS

A. RECEIPT OF ApPARENT PROHIBITED CONTRIBUTIONS FROM POSSIBLE

FOREIGN NATIONALS AND AN INCORPORATED ENTITY

Section 441 e of Title 2 of the United States Code states, in part, that it shall be

unlawful for a foreign national directly or through any other person to make any contribution

ofmoney, in connection with an election to any political office or in connection with any

primary election, convention, or caucus held to select candidates for any political office; or

for any person to SOlicit, accept, or receive any such contribution from a foreign national.

As used in 2 U.S.C. §441 e, the term "foreign national" is defined as a "foreign

principal" which includes: (1) a government ofa foreign country and a foreign political party;

(2) a person outside ofthe United States, unless it is established that such person is an

individual and a citizen of and domiciled within the United States, or that such person is not

an individual and is organized under or created by the laws ofthe United States or of any

State or other place subject to the jurisdiction ofthe United States and has its principal place

ofbusiness within the United States and, (3) a partnership, association, corporation,

organization, or other combination of persons organized under the laws ofor having its

principal place ofbusiness in a foreign country [22 U.S.C. §611(b»). This section further

defines "foreign national" as an individual who is not a citizen ofthe United States and who

is not "lawfully admitted for permanent residence" which means the status ofhaving been

lawfully accorded the privilege ofresiding permanently in the United States as an immigrant

in accordance with the immigration laws, such status not having changed [8 U.S.C.

§11 01 (a)(20)].

Section 441b(a) ofTitle 2 ofthe United States Code states, in relevant part,

that it is unlawful for any corporation organized by authority of any law ofCongress to make

a contribution in connection with any election to any political office, or for any corporation

or labor organization, to make a contribution in connection with any election to federal office

Page 5 of 20 Approved 12/09/99
4

and that it is unlawful for any candidate, political committee or any person knowingly to

accept or receive any contribution prohibited by this section.

Section 441 f ofTitle 2 ofthe United States Code states that no person shall

make a contribution in the name of another person or knowingly permit his name to be used

to effect such a contribution and no person shall knowingly accept a contribution made by

one person in the name of another person.

Sections 103.3(b)(2) and (4) ofTitle 11 ofthe Code ofFederal Regulations

state, in part, that the treasurer shall refund any contribution determined to be illegal to the

contributor within thirty days ofthe date on which the illegality is discovered. Further, any

contribution which appears to be illegal and which is deposited into a campaign depository

shall not be used for any disbursements by the political committee until the contribution has

been determined to be legal. The political committee must either establish a separate account

in a campaign depository for such contributions or maintain sufficient funds to make all such

refunds.

During our review ofreceipts, the Audit staff questioned 26 contributions,

totaling $90,000, as possibly coming from prohibited sources. These contribution checks

were deposited into the Victory '96 Federal account. Ofthis $90,000 total, $300 was

distributed to the GELAC. The contribution records included photocopies ofthe contribution

checks along with "Check Tracking Forms" which were internally-generated forms which

included contributor information as well as contribution coding data, such as Event Name,

DNC Contact, Solicitor and Source Code. The Check Tracking Fonns relative to 25 ofthese

26 items noted John Huang as the DNC Contact person. Six ofthese 25 items noted Charlie

Trie as the DNC Solicitor. The remaining item was a $2,000 check from Maria Lynn Hsia.

The source offunds relative to the checks for which Jolm Huang was noted as

the "DNC Contact" were questioned because Mr. Huang was described in numerous media

reports as being the subject ofUnited States Senate and United States Department ofJustice

(DOJ) investigations as a DNC fund-raiser who in 1995 and 1996 allegedly funneled foreign

national contributions to the DNC. Yall Lin "Charlie" Trie, according to media reports, was

indicted by a federal grand jury for allegedly collecting money from sourceS in China and

then distributing the money to U.S. citizens to donate to Democratic committees. The

contribution check from Maria Lynn Hsia was questioned by the Audit staff because Ms.

Hsia, according to several media reports, was indicted on federal charges oflaundering

campaign contributions by a Buddhist temple in California which allegedly reimbursed the

contributors with temple funds. The temple was incorporated in the state ofCalifornia when

these contributions were made. I

It appears that action was taken relative to eight ofthese questionable

contributions. The eight items were all initially deposited into the Victory '96 Federal

account in August or September of 1996. Seven ofthe items, totaling $34,900, were

I It should be noted that $200 of this $2,000 contribution was distributed to the GELAC. As of September 9,

1999, no action was taken relative to this contribution.

Page 6 of 20 Approved 12/09/99
5

apparently refunded to the contributors, and funds representing the value of one contribution,

in the amount of$IO,OOO, were forwarded to the U.S. Treasury by the DNC. One of the

seven refunds, in the amount of$lO,OOO, was paid from the Victory '96 Federal account on

October 16, 1996 and the other six, totaling $24,900, were apparently made by the DNC on

June 23,1997. 2 On June 25,1997, $10,000 was forwarded to the U.S. Treasury. Neither the

refunds nor the payment to the Treasury were made within the 30 days allowed by 11 CFR

§103.3(b).

In summary, action was taken relative to eight ofthese questionable

contributions, totaling $44,900 or approximately 50% ofthe $90,000 questioned.' However,

these actions were untimely. No separate account was maintained relative to questionable

contributions but the Committee did consistently maintain a sufficient balance to cover the

amounts involved pursuant to 11 CFR 103.3(b)(4).4

'i

In the Exit Conference Memorandum (the ECM), the Audit staff

recommended that Victory '96 officials provide evidence that the contributions in question

were not from prohibited sources, Absent such a demonstration, $45,100 ($90,000-

$44,900) should be paid to the United States Treasury. Iffunds were not available to pay this

amount, the amount should be disclosed as "debts owed" on Schedule D (Debts and

Obligations) until such time that funds were available to make the payment. The Audit staff

fU11her recommended that Victory '96 officials provide photocopies ofthe front and back 0 f

the six negotiated refund checks, totaling $24,900, paid by the DNC, as well as any

additional infonnation or explanation relative to this matter.

In its response to the ECM5

, General Counsel, DNC, representing Victory '96

stated that the inclusion ofthis recommendation was "wholIy improper" because " ...as the

ECM acknowledges, none ofthe contributions at issue, with the exception of an obviously

immaterial $300, went to the GELAC. Thus there is no basis for the Audit Division to

review or chalIenge these contributions." Counsel further stated that "...the DNC has in any

event fulIy complied with 11 CFR §103 .3(b) with respect to alI ofthese contributions" and

" ...there was no evidence whatsoever of any illegality at the time the contribution was

2 One ofthe refunds made on June 23,1997 was in the amount of$900 relative to a $1,000 contribution.

3 According to a DO) press release, dated August 12, 1999, Mr. Huang pleaded guilty on August 12, 1999 to a

felony violation of campaign finance laws and was sentenced to one year ofprobation, 500 hours of

community service, a $10,000 fine and was directed by the judge to continue cooperating with the

investigation as a condition of his probation. Mr. Trie pleaded guilty on May 21, 1999 to violating federal

campaign fmance laws by making a political contribution in someone else's name and by causing a false

statement to be made to the Federal Election Commission and was sentenced to three years probation, 200

hours of community service, four months of home detention and a $5,000 fine. Ms. Hsia was indicted in

Febmary 1998 on charges of conspiring to defraud the United States and causing false statements to be

submitted to the FEC. Her trial is scheduled for January 2000.

• TIlis fmding relates solely to contributions which were deposited into the Victory '96 Federal account and

which were questioned because the Check Tracking Forms included with the Victory '96 contribution records

noted John Huang as the DNC Contact, noted Charlie Trie as the DNC Solicitor, or the contribution was made

by Maria Hsia. This finding does not relate to possible prohibited contributions arising in other contexts.

'Of necessity, certain portions of the response to the ECM were excluded from this report.

Page 7 of 20 Approved 12/09199
6

received and deposited." He stated that "...questions about, and indications ofillegality

regarding, numerous contributions were raised in October and November of 1996" after

which the DNC conducted an intemal review ofseveral categories of contributions with the

assistance ofits outside counsel and a public accounting firm and the results ofthis review

were released at the end of February 1997. Counsel added that this review included a review

of all contributions attributed to John Huang regardless of amount and as a result, the DNC

refunded or disgorged to the U.S. Treasury 124 contributions, totaling $1,353,800, at the end

ofJune 1997.

Counsel stated that, except for the contribution fTom Maria Hsia, the following

action was already taken relative to the contributions questioned by the Audit staff;

(I) refunded prior to the internal review; (2) included in the internal review; (3) included in

the subsequent internal review of all contributions solicited by John Huang regardless of

amount; or, (4) not included in the internal revIew because the donor was known to the DNC.

Counsel concluded that "...after having had new evidence brought to its attention in October

and November of 1996 regarding of [sic) certain ofthese contributions, and having

conducted a thorough review, and having refunded or disgorged all contributions discovered

to be illegal, the DNC has complied with 11 C.F.R. § 103.3(b)." Counsel noted that U[w)ith

respect to the contribution from Maria Hsia, the DNC is aware of no evidence whatsoever

indicating that this contribution was in any way unlawful. The indictment ofMs. Hsia did

not include or refer to any contribution she herself made to the DNC."

The Audit staff notes that in the response to the ECM, no evidence was

provided relative to the sources of the 26 contributions in question. As the Audit staff

described above, action was already taken relative to 8 items, totaling $44,900 (seven refunds

and one payment to the United States Treasury). No payment ofthe remaining $45,100

($90,000 - $44,900) was made to the United States Treasury, nor was a "debt owed"

disclosed on Schedule D in this amount relative to the remaining 18 contributions. The Audit

stafffurther notes that photocopies ofthe six negotiated refund checks, totaling $24,900, paid

by the DNC were not provided.

The Audit staff disagrees with Counsel that this finding is improper. The

Audit Division was authorized under 26 U.S.C. §9007(a) and II CFR §9007.1(a)(I) to

conduct an audit ofthe activities ofthe candidates of each political party for President and

Vice-President, the candidates' authorized committees and their agents -- including

contributions to the legal and accounting compliance fund. The two fundraising participants,

DNC and GELAC, are required to comply with 2 U.S.C. §§441e, 441fand 441b(a) in the

context ofthe Victory '96 joint fundraising activities. The Audit staff does not consider the

fact that only $300 ofthe questionable contributions were transferred to GELAC to be

relevant to our review of contributions received as part ofthe Victory '96 joint fundraising

activities and the resultant inclusion ofthis finding in the report.

The Audit staff agrees that pursuant to 11 CFR §103.3(b)(2), the treasurer is

required to refund any contributions determined to be illegal within thirty days ofthe date on

which the illegality is discovered. Ifthe eighteen remaining contributions, totaling $45,100,

were determined to be permissible by DNC officials, or by individuals hired by the DNC to

Page 8 of 20 Approved 12/09/99
7

perform the intemal review described in the response, documentation verifying such

permissibility should have been provided. However, based on other information made

available to the Audit staff, four ofthe remaining 18 contributions, totaling $30,500, were

determined to be from permissible sources. These four items were from three individuals.

Also, based on other information made available to the Audit staff, it was further determined

that one ofthe seven contributions refunded, in the amount of$10,000, was refunded in a

timely manner pursuant to 11 CFR §103.3(b)(2).

With regard to the $2,000 contribution made by Maria Hsia, the Audit staff

agrees with Counsel that the indictment dealt with the alleged laundering of contributions

from a Buddhist temple to Democratic committees, not contributions directly from Ms. Hsia.

However, some ofthe contributions she allegedly laundered were deposited only a month or

so after the $2,000 contribution she made to Victory '96. As a result, the Audit staff

requested documentation relative to the source' of funds for the $2,000 contribution.

In summary, of the 26 contributions, totaling $90,000, initially questioned as

possibly originating from prohibited sources, four items, totaling $30,500, were determined

to be from permissible sources and one item, in the amount of$1O,OOO, was determined to

have been refunded in a timely manner. Ofthe remaining 21 contributions, totaling $49,500,

six, totaling $24,900, were refunded to the contributors· and funds representing the value of

one contribution, in the amount of $1 0,000, was forwarded to the U.S. Treasury. The action

taken with respect to these seven items was untimely pursuant to 11 CFR §103.3(b)(2). No

information was available nor was any apparent action taken relative to the remaining

contributions, totaling $14,600 ($49,500 - $24,900 - $10,000).

B. REPORTING OF RECEIPTS AND DISBURSEMENTS AS MEMO ENTRIES

Section 102.17(c)(8)(i)(A) ofTitle 11 ofthe Code of Federal Regulations

requires the fundraising representative to report all funds received in the reporting period in

which they are received and to report the total amount of contributions received from

prohibited sources during the reporting period, if any, as a memo entry. In addition, 11 CFR

§I02. 17(c)(8)(ii) requires the fundraising representative to report all disbursements in the

reporting period in which they are made.

Section 103.3(b)(3) ofTitle 11 ofthe Code of Federal Regulations states that

any contributions which on their face exceed the contribution limitations set forth in 11 CFR

110.1 or 110.2, and contributions which do not appear to be excessive on their face, but

which exceed the contribution limits when aggregated with other contributions from the same

contributor, and contributions which cannot be accepted under the net debts outstanding

provisions of 11 CFR 110.1(b)(3) and llO.2(b)(3) may be either deposited into a campaign

depository under 11 CFR 103.3(a) or returned to the contributor. If any such contribution is

deposited, the treasurer may request redesignation or reattribution ofthe contribution by the

contributor in accordance with 11 CFR 1l0.1(b), 1l0.l(k) or 1l0.2(b), as appropriate. If a

redesignation or reattribution is not obtained, the treasurer shall, within sixty days ofthe

treasurer's receipt ofthe contribution, refund the contribution to the contributor.

6 See Footnote Y on Page 5.

Page 9 of 20 Approved 12/09199
8

The Audit staffreviewed the receipts and disbursements attributed to the

Victory '96 joint fundraising activities and determined that some transactions were not

disclosed properly. The DNC, as the fundraising representative, only itemized the "federal"

portions of contributions deposited into the Victory '96 Federal account and did not report

the "non-federal" portions, totaling $450,926. The "non-federal" portions were redesignated

and transferred to the DNC's non-federal accounts because they were either in excess ofthe 2

U.S.C. §441a limit or were considered prohibited pursuant to 2 U.S.C. §44Ib. 7 No memo

entries were disclosed on Schedules A (Itemized Receipts) relative to the $450,926, as

required by II CFR §I02.17(8)(i)(A).

In the Audit staffs opinion, the following receipts and disbursements

transactions should have also been disclosed as memo entries in order to clarify the

disclosure aspect ofthe Victory '96 joint fundraising activities. The distribution ofnet

proceeds from the Victory '96 Federal Account'~o the DNC's General account (Federal),

totaling $1,166,737. A $250,000 transfer from the DNC's General account (Federal) to the

Victory '96 Federal account for joint fundraising start-up costs, along with the return of the

$250,000. These memo entries should be included on the appropriate Schedules A or

Schedules B (Itemized Disbursements) as warranted.

The Audit staff notes that if a separate reporting entity had been set up for

these joint fUl1draising activities, transfers involving the distributions of net proceeds and

involving start-up costs would have required disclosure. A Victory '96 official stated that

amended Schedules A and B containing memo entries would be filed.

In the ECM, the Audit staff recommended that amended Schedules A and B

be filed as discussed above. In its response to the ECM, Counsel representing Victory '96

stated the following:

"...the DNC disagrees that it is required to disclose, as memo

entries, any transfers made from the joint fundraising

representative accounts, to other federal accounts of the joint

fundraising representative. A review of the regulations, as well

as the FEC's Campaign Guide for Political Party Committees

make no mention ofsuch requirement, and no such

requirement has ever been imposed on the DNC with respect to

any otherjoint fundraising activities that it is [sic) in the past

several years.

Nevertheless, the DNC has amended its FEC reports to disclose

all internal transfers, as requested by the Audit Division."

The Audit staff notes that the amended Schedules A and B filed have

corrected the public record.

7 Fifteen such transfers, totaling $450,926, were made between August 12, 1996 and November 18, 1996.

Page 10 of 20 Approved 12/09/99
9

C. DISCLOSURE OF OCCUPATION AND NAME OF EMPLOYER

Section 434(b)(3)(A) ofTitle 2 ofthe United States Code states, in part, that

each report shall disclose the identification of each person (other than a political committee)

who makes a contribution to the reporting committee during the reporting period, whose

contribution or contributions have an aggregate amount or value in excess of $200 within the

calendar year, together with the date and amount ofsuch contribution.

Section 431(13)(A) ofTitle 2 ofthe United States Code defines the term

"identification" as, in the case of any individual, the name, the mailing address, and the

occupation ofsuch individual, as well as the name ofhis and her employer.

Section 432(i) ofTitle 2 ofthe United States Code states, in part, that when

the treasurer of a political committee show that'best efforts have been used to obtain,

maintain, and submit the information required by this Act for the political committee, any

report or any records ofsuch committee shall be considered in compliance with this Act.

Section 104.7(b) ofTitle 11 ofthe Code ofFederal Regulations states, in

h. relevant part, that the treasurer will only be deemed to have exercised best efforts to obtain,

Q maintain and report the required information iffor each contribution received aggregating in

excess of $200 per calendar year which lacks required contributor information, the treasurer

r~ makes at least one eff01i after the receipt ofthe contribution to obtain the missing

ru infonnation. Such effort shall consist of either a written request sent to the contributor or an

oral request to the contributor documented in writing. The written or oral request must be

made no later than thirty days after receipt ofthe contribution. The written or oral request

shall not include material on any other subject or any additional solicitation, except that it

may include language solely thanking the contributor for the contribution.

The Audit staff conducted a sample review of contributions from individuals,

which were deposited into the Victory '96 Federal account, to determine ifthe required

information, relative to receipts required to be itemized, was adequately disclosed. Our

testing revealed that the minimum requirements for reporting occupation and/or name of

employer were not met for a material number ofreported entries. For these items, the report

entries contained the annotation "REQUESTED."

The Audit stafflocated approximately 77% ofthe missing information for

these items in the Victory '96 Federal account contribution records or in the Receipts

database files relative to the DNC or the GELAC, the two fundraising participants. A

Victory '96 official stated that he was surprised that this information was not included on

amended Schedules A (Itemized Receipts) filed by the DNC relative to Victory '96

contributions.

In the ECM, the Audit staffrecommended that amended Schedules A be filed

to disclose the occupation and name of employer information obtained but not yet disclosed.

In its response to the ECM, Counsel representing Victory '96 stated that an amended report

was filed by the DNC to correct these errors. The Audit staffreviewed the amended

Page 11 of 20 Approved 12/09/99
•

10

Schedules A filed by the DNC (relative to the Victory '96 contributions) and detennined that

some ofthe errors were cOITected. However, the minimum requirements for reporting

occupation andlor name of employer were still not met for a material number ofreported

entries.

D. DISCLOSURE OF DEBTS AND OBLIGATIONS

Section 434(b)(8) ofTitle 2 ofthe United States Code states, in part, that each

report under this section shall disclose the amount and nature of outstanding debts and

obligations owed by or to such political committee.

Section 104.1l(a) ofTitle 11 ofthe Code ofFederal Regulations states, in

part, that debts and obligations owed by or to a'political committee which remain outstanding

shall be continuously reported until extinguished.

The Audit staffreviewed all disbursements made from the two Victory '96

bank accounts to detennine if debts and obligations owed were disclosed as required. It

should be noted that any disclosure ofthese debts was included on the DNC's Schedules D

(Debts and Obligations) and were not labeled as Victory '96 debts. The records associated

with these disbursements were analyzed to detennine which payments met the requirements

for disclosure as debts on Schedules D; we detennined that debts totaling $332,573 were not

disclosed as required. There were 36 checks associated with these errors.

It should be noted that for some ofthe debt errors, the Audit staff was able to

locate debt balances disclosed on the DNC's Schedules D which were larger than the

amounts in question but we were unable to verify ifthese items were included in these

balances. A schedule ofthe debt errors was presented to Victory '96 officials. These

officials provided vendor history reports showing vendor transaction activity for five vendors

but the Audit staff was unable to verify that the debts in question were included within larger

balances relative to these vendors. As a result, no adjustment was made to the original

schedule provided to the Victory '96 officials at the close of fieldwork.

In the ECM, the Audit staffrecommended that amended Schedules D be filed

to correct these debt and obligation errors or provide evidence which demonstrated that these

items were disclosed properly. In its response to the ECM, Counsel representing Victory '96

stated that "[t]hese omissions were due to inadvertent computer errors" and that amended

reports were filed by the DNC which included the disclosure ofthese debts. The Audit staff

reviewed the amended Schedules D filed by the DNC relative to the Victory '96 debts and

determined that the debt errors were materially corrected. The Audit staff notes that no

additional infonnation was provided relative to the unverified debt amounts for which debt

balances previously disclosed on the DNC's Schedules D were larger than the amounts in

question. However, Counsel representing Victory '96 has asserted that these items were

covered by these larger balances. All ofthe remaining items were corrected by the amended

Schedules D.

Page 12 of 20 Approved 12/09/99
RECEIVED

FEDERAL ELECTlort CO'4~lISSI0N

AUDI1 DIVISIOrt

FEDERAL ELECTION COMMISSION

WASHINGTON. D.C Z0463

»ov 12 3 Oil PH 199

November 10, 1999

MEMORANDUM

Robert J. Costa

Assistant Staff Director

Audit Division

FROM: Lawrence M. Noble

General Counsel

{)..\J I Kim Bright-Coleman\~ \'J 1 I Associate General Counsel

THROUGH: James A. Pehrkon

Staff Director

TO:

•

Rhonda J. Vosdingh

Assistant General Counsel

Joel J. Roessner "3"3'«..

Attorney

SUBJECT: Proposed Audit Report On The Victory '96 Joint Fundraising Activities (LRA

#538)

I. INTRODUCTION

The Office ofGeneral Counsel has reviewed the proposed Audit Report On The Victory

'96 Joint Fundraising Activities ("Report") received by this Office on October 8,1999. Victory

'96 was ajoint fundraising activity, within the meaning of 11 C.F.R. § 102.17. The Democratic

National Committee ("DNC") and the Clinton/Gore '96 General Election Legal and Compliance

Fund ("Clinton/Gore '96 GELAC") were the joint fundraising activity participants, and the DNC

was the fundraising representative, withi,n the meaning of 11 C.F.R. § 102.l7(b)(2). The

following memorandum summarizes our comments on the proposed Report.1 We concur with

The Commission's discussion ofthis document is not exempt from disclosure under the Commission's

Sunshine Act regulations. and the document should be considered in open session. II C.F.R. § 2.4.

Page 13 of 20 Approved 12/09/99
Memorandum to Robert J. Costa

Proposed Audit Report On The Victory '96 Joint Fundraising Activities (LRA 11538)

Page 2

the findings in the proposed Report that are not discussed in the following memorandum. If you

have any questions, please contact Joel J. Roessner, the attorney assigned to this audit.

II. RECEIPT OF APPARENT PROHIBITED CONTRIBUTIONS FROM POSSIBLE

FOREIGN NATIONALS AND AN INCORPORATED ENTITlY (II.A.)

The Audit Division directed the attention ofthis Office to its finding on contributions

possibly received from foreign nationals and an incorporated entity. As set forth in the Report,

the Audit Division questioned twenty-six contributions totaling $90,000 as possibly having been

contributed by such prohibited donors. Report at 4-5. The Audit staff concluded that corrective

action occurred with respect to eight ofthese contributions totaling $44,900. lei. Ofthese eight

contributions, the Audit Division concluded that one $10,000 contribution was disgorged to the

United States Treasury, and that the remaining,seven contributions, totaling $34,900 were

refunded, but not within the thirty day period ohime required by 11 C.F.R. § I03.3(b). Id.

In the Exit Conference Memorandum ("ECM"), the Audit staff recommended that

Victory '96 provide evidence that the contributions were not received from prohibited sources.

Id. at 5. To the extent that Victory '96 could not make such a showing, the Audit staff

recommended that the amounts should be paid to the United States Treasury or, iffunds for such

payment were not presently available, reported as debts.2 Id Victory '96 raises three issues with

respect to this finding, which are each addressed in turn, below.

A. Scope Of The Audit

In its response to the ECM, Victory '96 first asserts that "there is no basis for the Audit

Division to review or challenge these contributions" because "none ofthe contributions ... with

the exception of an obviously immaterial $300, went into the GELAC." ECM Response at 2, see

also id. at 3 (referring to "this audit of the GELAC").

The Audit Division was conducting an audit of Victory '96, which was ajoint fundraising

project ofthe DNC and the Clinton/Gore '96 GELAC. The Audit Division was authorized under

2 U.S.C. § 9007(a) and 11 C.F.R. § 9007 .1(a)(I) to conduct an audit of the activities ofthe

candidate, the candidate's authorized committee and their agents, including contributions to the

legal and accounting compliance fund. As the fundraising representative for all participants, the

DNC was also an authorized committee ofthe candidate. 11 C.F.R. § 102.l7(a)(I)(i). Both

participants therefore were subject to examination under 2 U.S.C. § 9007(a), and this Office

agrees with the Audit Division that the Audit staffwas not required to limit its investigation to

the portion ofcontributions received by the GELAC.

Although the ECM recommend~ddisgorging the illegal contributions to the United States Treasury, this

Office's opinion is that refunding the amounts to the contributors would also have been appropriate corrective

action. 11 C.F.R. § I03.3(b). Furthermore, this Office notes that one court has held that where an illegal

contribution should have been refunded to the contributor pursuant to 11 C.F.R. § I03.3(b), but instead was

disgorged to the United States Treasury, the contributor may recover the amount from the United States under the

"illegal exaction" doctrine. Fireman v. United States, 44 Fed. CI. 528 (1999).

Page 14 of 20 Approved 12/09/99
Memorandulll to Robert J. Costa

Proposed Audit Report On The Victory '96 Joint Fundraising Activities (LRA #538)

Page J

B. Amounts Not Refunded Or Disgorged

With respect to amounts which Victory '96 has declined to refund (or report as a debt),

Victory '96 states that "as to any check 0 • 0 not already refunded, the Commission already has

documents supporting the ... decision to retain the contribution." ECM Response at 2.3 The

proposed Report rejects this argument, stating that "[i]fthe eighteen remaining contributions,

totaling $45,100, were determined to be permissible ... documentation verifying such

permissibility should have been provided." Report at 6. This Office agrees that Victory '96 has

not adequately presented the evidence which it contends supports its claim that the eighteen

contributions were legal.

However, from other infonnation available to the Commission, it appears that Lucy Ham

(who made two ofthe questioned contributionv, Henry Huang and David Hung are in fact

United States citizens. These three contributors made four ofthe eighteen retained contributions

in question, in a total amount of$30,500, out of$45,100 in question. This Office therefore

recommends that the proposed Report be revised to reflect this conclusion.

C. Timeliness Of Refunds

With respect to seven contributions which Victory '96 refunded, Victory '96 argues that

it has complied with II C.F.R. § 103.3(b) and its refunds therefore were timely, stating that:

[Q]uestions about, and indications ofillegality regarding, numerous contributions

were raised in October and November of 1996. From November 1996 through

February 1997, the DNC conducted an internal review ofseveral categories of

contributions, with the assistance ofits outside counsel, Debevoise & Plimpton,

and the accounting firm of Ernst & Young. The results ofthis review ... were

released at the end of February 1997. As a result ofthe DNC Internal review, as

modified by additional information developed between the end of February and

the end ofJune, 1997, including a review of all contributions attributed to John

Huang regardless of amount, the DNC refunded or disgorged to the U.S. Treasury

124 contributions totaling $1,353,800 at the end ofJune 1997.

ECM Response at 2.

The Commission's regulations provide:

With respect to the contribution from Maria Hsia. Victory '96 states that there is "no evidence whatsoever

indicating that this contribution was in any way unlawful. The indictment ofMs. Hsia did not include or refer to

any contribution she herselfmade ...." .ECM Response at 3. The Audit staff replies that it "agrees ... that the

indictment dealt with the alleged laundering ofcontributions from a Buddhist temple to Democratic committees, not

contributions directly from Mr. Hsiao However, some ofthe contributions she allegedly laundered were deposited

only a month or so after the contribution she made to Victory '96." Report at 7. This Office agrees that Ms. Hsia's

alleged "laundering" ofother corporate contributions during the same election cycle is ample reason for the Audit

staff to request that Victory '96 provide confirmation ofthe legality ofthis particular contribution.

Page 15 of 20 Approved 12/09/99
Memorandum to Robert J. Costa

Proposed Audit Report On The Victory '96 Joint Fundraising Activities (LRA 11538)

Page 4

If the treasurer in exercising his or her responsibilities under 11 CFR

103.3(b) determined that at the time a contribution was received and deposited, it

did not appear to be made by a corporation, labor organization, foreign national or

Federal contractor, or made in the name of another, but later discovers that it is

illegal based on new evidence not available to the political committee at the time

of receipt and deposit, the treasurer shall refund the contribution to the contributor

within thirty days of the date on which the illegality is discovered. Ifthe political

committee does not have sufficient funds to refund the contribution at the time the

illegality is discovered, the political committee shall make the refund from the

next funds it receives.

11 C.F.R. § 103.3(b)(2). The Commission's regulations thus require that each contribution

discovered to be illegal be refunded "within thiJity days ofthe date on which the illegality is

discovered." ld.

This Office agrees with the Audit Division's conclusion that the actions of Victory '96

(as described by its counsel) did not satisfy the requirements ofthis regulation. Rather than

refunding each illegal contribution within thirty days ofthe discovery of illegality, Victory '96

appears to have waited until the DNC had completed its investigation with respect to all ofthe

illegal contributions before making refunds en masse" Furthermore, other information available

to the Commission indicates that six ofthe seven contributions in question in fact were made

after the limit imposed by 11 C.F.R. § 103.3(b)(2). This Office recommends that the proposed

Report be revised to note that other information available to the Commission indicates that these

refunds were not timely under 11 C.F.R. § 103.3(b)(2).

The remaining refunded contribution, a $10,000 contribution for Kyung Hoon Lee, was

relimded on October 16, 1996. See Report at attachment 1. Unless, with respect to this

contribution, the Audit staff challenges the position of Victory '96 that indications ofillegal

contributions were raised in October and November of 1996, see ECM Response at 2, it appears

that this contribution was refunded timely, and this Office recommends that the proposed Report

be revised accordingly. See 11 C.F.R. § 103.3(b)(2).

III. FOOTNOTE 5

The Audit staff directed the attention ofthis Office to footnote 5. This Office

recommends that the footnote be amended to state: "Of necessity, certain portions ofthe

response to the ECM were excluded from this report."

Indeed, counsel for Victory '96 does not even represent that the refunds were made within thirty days of

the completion ofthe independent investigation. To the contrary, it appears that the investigation was completed no

later than the end of February, 1997, at which time the results "were released," while the refunds were not made

until four months later "at the end ofJune 1997." ECM Response at 2. Victory '96 nevertheless claims that it

complied with the thirty day limit, explaining that the evidence ofillegal contributions was "modified by additional

information developed between the end of February and the end ofJune, 1997, including a review ofall

contributions attributed to John Huang regardless of amount ...." ld.

Page 16 of 20 Approved 12/09/99
FEDERAL ELECTION COMMISSION

WASHINGTON, D.C. 204&3

December 17, 1999

Mr. Andrew Tobias, Treasurer

DNC Services Corporation/

Democratic National Committee

430 South Capitol Street, S.E.

Washington DC 20003

Ms. Joan C. Pollitt, Treasurer

Clinton/Gore '96 General Election Legal

& Accounting Compliance Fund

P.O. Box 19584

Washington, DC 20036

Dear Mr. Tobias and Ms. Pollitt:

Attached please find the Audit Report on the Victory '96 joint fundraising activities

held 011 behalf of the Democratic National Committee (DNC) and Clinton/Gore '96

General Election Legal & Accounting Compliance Fund (GELAC). The Commission

approved the report on December 9, 1999. As noted on Page 3 of this report, the

Commission may pursue any ofthe matters discussed in an enforcement action,

The Commission approved Audit Report will be placed on the public record on

December 27,1999. Should you have any questions regarding the public release ofthe

report, please contact the COllunission's Press Office at (202) 694-1220. Any questions

you have related to matters covered during the audit or in the report should be directed to

Marty Favin or Rick Halter of the Audit Division at (202) 694-1200 or toll free at (800)

424-9530.

Attaclunent as stated

cc: Joseph E. Sandler, General Counsel, DNC

Neil P. Reiff, Deputy General Counsel, DNC

Eric Kleinfeld, Chief Counsel, GELAC

Page 17 of 20 Approved 12/09/99
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Page 18 of 20 Approved 12/09/99
CHRONOLOGY

THE VICTORY '96 JOINT FUNDRAISING ACTIVITIES HELD ON

BEHALF OF THE DEMOCRATIC NATIONAL COMMITTEE

AND CLINTON/GORE '96 GENERAL ELECTION LEGAL &

ACCOUNTING COMPLIANCE FUND

Audit Fieldwork

Exit Conference Memorandum

to the Committee

Response Received to the

Exit Conference Memorandulll

Audit Report Approved

6/29/98 - 10/05/98

6/25/99

9/09/99

12/09/99

Page 19 of 20 Approved 12/09/99
Page 20 of 20 Approved 12/09/99