FEDERAL ELECTION COMMISSION

WASHINGTON, D.C. 20463

March II, 2009

MEMORANDUM

TO: Wanda J. Thomas

Acting Assistant Staff Director

Audit Division

THROUGH: Joseph F. Stoltz

Acting Staff Direct

FROM:

SUBJECT:

Christopher Hughey /)<

Deputy General Counsel /

Lawrence L. Calvert, Jr.

Associate General Courts

General Law and Advice

Lorenzo Holloway

Assistant General Counsel

Public Finance and Audit Advice

Albert Veldhuyzen/4/^

Attorney

Interim Audit Report on CWA COPE PCC (LRA # 760) and AFL-CIO COPE

PCC(LRA#761).

I. INTRODUCTION

The Office of General Counsel has reviewed the Interim Audit Report ("Proposed

Report") on CWA COPE PCC ("CWA PCC") and the Interim Audit Report on AFL-CIO COPE

PCC ("AFL PCC")- This memorandum reflects our comments on both audit reports. In these

comments, we address: 1) Whether CWA PCC can legally serve as a collecting agent for AFLPCC; 2) Whether CWA PCC complied with the collecting agent requirements; 3) How should

CWA PCC and AFL PCC report past and future contributions that were and will be transmitted
Memorandum to Wanda J. Thomas

Interim Audit Report on CWA COPE PCC and AFL-CIO COPE PCC

LRA # 760 & 761

Page 2

to AFL PCC. If you have any questions, please contact Albert R. Veldhuyzen, the attorney

assigned to this audit.1

II. BACKGROUND

CWA PCC, the separate segregated fund ("SSF") of an international union ("CWA"),

receives and reports contributions from individuals who sign payroll authorization cards. The

authorization cards contain a statement that the contributions will be used in a "joint fimdraising"

effort and that CWA PCC and AFL PCC are authorized to use the contributions "on behalf of

candidates for federal, state, and local offices and [for] addressing political issues of public

importance." Thus, contributors do not designate specific and separate amounts for CWA PCC

and AFL PCC; rather, their undifferentiated contributions are received by CWA PCC and

deposited into its account.

At various intervals, CWA PCC transmits an agreed portion of the collections in a lump

sum to AFL PCC, the SSF of an organization of national and international unions ("AFL") of

which CWA is a member.2 AFL PCC reports this lump sum transmittal as a transfer from an

affiliated committee. The audit confirmed that: 1) CWA PCC does not maintain a separate

transmittal account solely for AFL PCC or keep separate records of all such receipts and

deposits; 2) CWA PCC does not forward the individual (payroll contributor) contribution

amounts and contributor information (about the payroll contributor) to AFL PCC or maintain

those records of deposits and transmittals for three years; 3) AFL PCC does not report the full

amount of each contribution received from the original contributor when required. See 11 C.F.R.

§§ 102.6(c)(4), 102.6(c)(5), 102.6(c)(6), 102.6(c)(7), 102.8.

Prior to examining the mechanics of the transfers from CWA PCC to AFL PCC, it is

important to discuss the legal status of each of the parties and their concomitant rights and

responsibilities. Specifically, we seek to establish whether CWA PCC is a collecting agent of

AFL PCC governed by the Commission's regulations. If CWA PCC is a collecting agent, it

must abide by the regulations governing collecting agents. Alternatively, if the SSFs are

affiliated, they may transfer unlimited funds to each other. If CWA PCC cannot be a collecting

agent and the SSFs are unaffiliated, CWA PCC made excessive contributions to AFL PCC. The

answer to these questions will help determine the transfer, reporting, and recordkeeping

responsibilities of the parties.

1

 The Office of General Counsel recommends that the Commission consider this document in Executive

Session because the Commission may eventually decide to pursue an investigation of matters contained in the

proposed Report. 11 C.F.R. §§ 2.4(a) and (b)(6).

2

 During the audit period, AFL PCC received four transfers from CWA PCC: 1) $ 100,000 (July 29, 2005);

2) $100,000 (July 26,2006); 3) $50,000 (June 27, 2006); 4) $50,000 (July 20,2006). This Office is unaware of the

rationale for the timing and amounts of the transfers, and we understand that Audit is unaware as well.
Memorandum to Wanda J. Thomas

Interim Audit Report on CWA COPE PCC and AFL-CIO COPE PCC

LRA#760&761

Page 3

III. AS A COLLECTING AGENT FOR AFL PCC, CWA PCC MUST MEET THE

REGULATORY REQUIREMENTS FOR COLLECTING AGENT AND AFL PCC MUST

ENSURE REQUIREMENTS ARE MET.

The Federal Election Campaign Act ("the Act") limits the amount of funds that one

committee may contribute to another non-affiliated committee. See 2 U.S.C. § 441a(a)(2)(C). A

committee may not make a contribution greater than $5,000 to another non-affiliated committee.

2 U.S.C. § 441a(a)(2)(C). By contrast, affiliated committees share a single limit on contributions

made and a single limit on contributions received, but can transfer unlimited funds to each other.

11 C.F.R. §§ 100.5(g)(3), 110.3(c)(l), 104.3(a)(2)(v). The affiliation regulation specifies that all

committees controlled by a single national or international union are affiliated and share a single

contribution limit. 11 C.F.R. § 100.5(g)(3)(ii).

CWA PCC is a committee of a single international union. By contrast, AFL PCC is a

committee of an organization of national and international unions. 11 C.F.R. § 100.5(g)(3)(iii).

Although all of the committees established by an international union and its locals and other

subordinate organizations are affiliated, 11 C.F.R. § 100.5(g)(3)(ii), and all of the committees

established by an organization of national or international unions and that organization's state or

local central bodies are affiliated, 11 C.F.R. § 100.5(g)(3)(iii), committees established by a single

union are not affiliated with the committees established by an organization of unions. Even

though the single union is a part of an organization of unions, its committees are not affiliated

with the organization of unions (nor with its subordinate bodies) if they are not controlled by the

latter. 11 C.F.R. § 100.5(g)(2). As applied here, this means that CWA PCC and AFL PCC are

not affiliated, and they do not claim to be.3 Consequently, they may not contribute more than

$5,000 to each other. Moreover, each SSF must report its own contributions received.

Another possibility is the collecting agent relationship. The transactions between CWA

PCC and AFL PCC suggest there is a collecting agent relationship between the committees. In a

collecting agent relationship, the collecting agent can transfer contributions collected for the

benefit of the other SSF. This raises the question of whether CWA PCC can legally serve as a

collecting agent for another unaffiliated SSF.

A collecting agent relationship allows an organization to collect and transmit

contributions to one or more separate segregated funds to which it is related. 11 C.F.R.

§ 102.6(b)(l). If it were a collecting agent, CWA PCC could transfer to AFL PCC unlimited

sums of contributions that were in fact made to AFL PCC. The regulations outline four

circumstances when an entity may serve as a collecting agent for another organization.

11 C.F.R. § 102.6(b)(l). One of those circumstances is when an international union collects

contributions on behalf of a separate segregated fund of a federation of which the international

union is a member. 11 C.F.R. § 102.6(b)(l)(iv). Although the international union (in this case,

CWA), the connected organization, is clearly permitted to collect on behalf of AFL PCC, the

3

 The current practice of having CWA PCC report all contributions, regardless of whether it keeps them or

transmits them to AFL PCC, would be permissible if both organizations were "affiliated," sharing a single

contribution limitation. See 2 U.S.C. § 441a(a)(l)(C); 11 C.F.R. §§ 100.5(g)(3), 110.3(a).
Memorandum to Wanda J. Thomas

Interim Audit Report on CWA COPE PCC and AFL-CIO COPE PCC

LRA # 760 & 761

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regulations do not specify that its separate segregated fund (CWA PCC) may collect on behalf of

a separate segregated fund of the federation (APL PCC). However, the Commission, in

Advisory Opinion 2000-03, has allowed an SSF to step into the shoes of its connected

organization, albeit in the context of funding a candidate appearance before the restricted class.

There is nothing in AO 2000-03 that suggests that this principle must be limited to funding a

candidate's appearance before a restricted class. Therefore, as a legal matter, we conclude that

CWA PCC can function as a collecting agent for AFL PCC. However, it would need to abide by

the rules governing collecting agents at 11 C.F.R. § 102.6(c).4

Under that section, the collecting agent must transmit to the recipient committee the full

amount of each contribution collected within 10 days after receipt for contributions more than

$50 or 30 days for contributions of $50 or less. As relevant to these facts, the collecting agent

must do one of the following three things:

1) Establish a transmittal account to be used solely for the deposit and transmittal of

funds collected on behalf of the SSF. 11 C.F.R. § 107.6(c)(4)(i).

2) Deposit the contributions collected into its own treasury account, keeping separate

records of all receipts and deposits that represent contributions to the committee for which the

agent is acting. 11 C.F.R. § 102.6(c)(4)(ii).

3) Deposit the contributions collected for the SSF into an account otherwise established

as a non-Federal account, keeping separate records of all receipts and deposits that represent

contributions to the committee for which the agent is acting. 11 C.F.R. § 102.6(c)(4)(iii).

As relevant here, the collecting agent must also transmit, along with the contributions, the name

and address of the contributor and the date of receipt for each contribution between $51 and

$200, and the name, address, occupation and name of employer of the contributor for each

contribution in excess of $200. 11 C.F.R. §§ 102.6(c)(5), 102.8. In addition, the collecting agent

must retain all records of contribution deposits and transmittals for three years for Commission

inspection. 11 C.F.R. § 102.6(c)(6). However, it is the receiving SSF that must report the full

amount of each contribution received as a contribution from the original contributor. 11 C.F.R.

§ 102.6(c)(7).

The audit revealed that CWA PCC does not have a separate transmittal account or keep

separate records of all receipts and deposits that represent contributions to AFL PCC. CWA

PCC does not have separate records of individual contributions because it did not consider itself

bound by the collecting agent regulations. Consequently, such records were not retained for

three years for Commission inspection. 11 C.F.R. §§ 102.6(c)(4), 102.6(c)(5), 102.6(c)(6),

102.6(c)(7), 102.8. Fundamentally, CWA PCC did not keep separate records of receipts and

deposits, segregate those portions intended for AFL PCC, or distinguish contributions at the

individual level. 11 C.F.R. § 102.6(c)(4)(ii)(B). Having failed to distinguish between

4

 It is also essential that checks provided to unions representing a combined payment of union dues, other

employee deductions, and voluntary contributions to an SSF be properly disaggregated. 11 C.F.R. § 102.6(c)(3). In

our situation, it is assumed that the funds have already been disaggregated so that funds received by CWA PCC are

permissible federal contributions and intended to be so by the original contributors.
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Interim Audit Report on CWA COPE PCC and AFL-CIO COPE PCC

LRA # 760 & 761

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contributions intended for CWA PCC and AFL PCC, they could not comply with the

requirement to keep separate records of contributions. Given that these separate records were

not kept, the arrangement violated the Commission's collecting agent regulations.

CWA PCC and AFL PCC assert that their relationship has aspects of joint fundraising,

and aspects of a collecting agent relationship, but acknowledge that the transactions here do not

fit precisely into either regulatory category. The result, they assert, is that neither the joint

fundraising regulations of 11 C.F.R. § 102.17 nor the collecting agent regulations of 11 C.F.R.

§ 102.6 apply here, because "the Commission has never addressed the relative obligations of two

SSFs undertaking such an arrangement." Letter from Lawrence Gold to Tom Hintermister, at 7

(July 8,2008). The committees' assertions, however, ignore this key point: the Act and

regulations create a system in which the $5,000 limit on contributions between committees is a

default rule, and the various statutory and regulatory provisions about transfers between

committees provide, in essense, very specific and limited exceptions to that default rule. There

are a number of these exceptions. First, as noted, affiliated committees may transfer unlimited

amounts to each other. 2 U.S.C. § 441a(a)(5); 11 C.F.R. § 110.3(c)(l). Second, the authorized

committee of a candidate may transfer excess campaign funds to political party organizations—

including Federal party committees—without limit. 2 U.S.C. § 439a. Third, national, district,

state, and local committees of the same political party may transfer unlimited amounts between

each other. 2 U.S.C. § 441a(a)(4). Fourth, under certain circumstances, an authorized

committee of a candidate for a Federal office may transfer an unlimited amount to a general

election (of unused primary funds); to a future election cycle; or to the authorized committee of

the same candidate for a different Federal office. 2 U.S.C. § 441a(a)(5)(C); 11 C.F.R. §

110.3(c). Fifth, joint fundraising representatives of committees other than SSFs engaged in joint

fundraising under 11 C.F.R. § 102.17 may, without limit, transfer to each participating

committee its proper share of the joint fundraising proceeds. 11 C.F.R. § 102.17. Finally, a

committee acting as a "collecting agent" for another committee pursuant to 11 C.F.R. § 102.6

may transfer the full amount of contributions received on the other committee's behalf to the

other committee.

Thus, the fact that the committees use the label of "joint fundraising'1 and term their

arrangement "unique" does not mean that they get to create their own exception and make their

own rules.5 Either they fit into one of the specifically described exceptions, or their transactions

5

 The SSFs contend that the unlimited transfers are permissible because the committees are engaging in joint

fundraising. However, if this rationale is accepted, any two committees who share contributors would be able to

claim that they too are doing joint fundraising. Allowing this would tend to undermine the transfer rules, which

permit transfers from one committee to another only in limited circumstances. See 11 C.F.R. § 110.3(c). Those

limited circumstances include the transfer of funds between affiliated committees and between collecting agents and

SSFs. 11 C.F.R. § 110.3(c)(l). Another circumstance where unlimited transfers are allowed concerns the transfer of

joint fundraising proceeds, "provided that no participating committee or organization governed by 11 C.F.R.

§ 102.17 received more than its allocated share of the funds raised." 11 C.F.R. § 110.3(c)(2). However, since

section 102.17 is specifically limited to committees other than SSFs, this provision allowing unlimited transfers

specifically does not apply to CWA PCC or AFL PCC. Both committees specifically acknowledge that they are not

conducting joint fundraising as describled in 11 C.F.R. § 102.17, and have not followed the procedures in that

regulation.
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Interim Audit Report on CWA COPE PCC and AFL-CIO COPE PCC

LRA # 760 & 761

Page 6

with each other are subject to contribution limits. The facts show that CWA PCC was, if not

using these words, purporting to act as AFL PCC's collecting agent. Accordingly, they were

required to structure that arrangement in conformity with the collecting agent regulations.

The major flaw in CWA PCC and AFL PCC's arrangement occurred when, having

determined to deposit all contributions into its own account, CWA PCC failed to keep separate

records of all receipts and deposits that represented contributions to AFL PCC. In the absence of

such records, it is simply impossible to determine which contributions were made to CWA PCC

and which to AFL PCC. As a result, it is also impossible to tell which contributions to AFL PCC

were in amounts less than $50, and which more; which were transferred within ten days of

receipt, which within thirty days, and which longer; and for which ones CWA PCC was required

to forward contributor information to AFL PCC, and for which ones it was not. The practical

effect appears to have been that AFL PCC could simply have as much money as it wanted out of

CWA PCC's account (or at least as much as CWA PCC was willing to send it), whenever it

needed it, without regard to any facts pertaining to the actual contributors. In effect, CWA PCC

and AFL PCC operated, for purposes of these funds transfers, as if they were affiliated

committees. This they could not do.

In conclusion, CWA PCC and AFL PCC are not affiliated entities sharing one

contribution limit. As such, they cannot transfer unlimited funds to each other. 11 C.F.R.

§ 110.3(c). CWA PCC qualifies as a collecting agent, which allows it to transmit to AFL PCC

all contributions received on behalf of AFL PCC. As a collecting agent, however, CWA PCC

must comply with certain collecting agent rules. These include the transmittal of contributions

exceeding $50 within 10 days and of all other contributions within 30 days, and the transmission

of contributor information for contributions exceeding $50. CWA PCC is also required to keep

separate records of the contributions collected and transmitted and AFL PCC must report

contributions received to the Commission. CWA PCC did not comply with these rules. This

Office, therefore, recommends that the interim audit report on CWA PCC include a finding that

CWA PCC did not comply with the collecting agent rules. Since AFL PCC was responsible for

ensuring that CWA PCC would comply with the collecting agent rules, see 11 C.F.R.

§ 102.6(c)(l), we also recommend that the interim audit report on AFL PCC include a finding

that AFL PCC failed to do so.

The SSFs have specific transfer, recordkeeping, and reporting responsibilities, the

mechanics of which are discussed below.

IV. CWA PCC AND AFL PCC FAILED TO PROPERLY REPORT THEIR

ACTIVITIES AND NEED TO CORRECT THEIR PROCEDURES & PAST REPORTS.

CWA PCC reported the questionable transfers to AFL PCC as "transfers to

Affiliated/Other Party Committees." FEC Form 3X, Line 22. In turn, AFL PCC reported the

transfers as "Transfers From Affiliated/Other Party Committees." FEC Form 3X, Line 12. As

previously discussed, CWA PCC and AFL PCC are not affiliated committees and therefore, the

transfers should not have been reported as transfers to/from affiliated committees. Rather, the

SSFs should follow these procedures in the future, for contributions transmitted to AFL PCC.
Memorandum to Wanda J. Thomas

Interim Audit Report on CWA COPE PCC and AFL-CIO COPE PCC

LRA#760&761

Page?

At the outset, the Act requires that CWA PCC and AFL PCC retain all records of

deposits and transmittals for three years and make the records available to the Commission upon

request. 11 C.F.R § 102.6(c)(6). AFL PCC is responsible for ensuring that the record-keeping,

disclosure, and transmittal requirements set forth in the Commission's regulations for collecting

agent accounts are met by CWA PCC. 11 C.F.R. § 102.6(c)(l).

Assuming the two committees wish all contributions initially to be deposited in CWA

PCC's account, the reporting would have to proceed in the following manner. CWA PCC would

need to report the aggregate amount of contributions received for itself on line 1 l(a), reporting

the aggregate amount of unitemized contributions on line 1 l(a)(ii), itemizing itemizable

contributions on Schedule A, and reporting the aggregate amount of itemized contributions on

line 1 l(a)(i). It would also need to report the aggregate amount of contributions received for

AFL PCC on line 17 as "other Federal receipts" and it would need to report its transfers of those

contributions to AFL PCC on line 29 as other disbursements, itemizing the transfer on Schedule

B as a transfer of funds received on behalf of AFL PCC in its role as a collecting agent. CWA

PCC, of course, would need to transmit to AFL PCC any contributor and date of receipt

information required by 11 C.F.R. §§ 102.6(c)(5) and 102.8.

AFL PCC would need to include the aggregate amount of contributions received from

CWA PCC in the aggregate amount of its contributions received as reported on line 1 l(a),

include the aggregate amount of unitemized contributions received in a transfer hi the total

amount of its unitemized contributions reported on line 1 l(a)(ii), and itemizing itemizable

contributions as necessary on Schedule A and including those contributions in its aggregate

amount of itemized contributions.

For past CWA PCC and AFL PCC reports, it may be impossible for the SSFs to fully

correct their reports because of the long-standing failure to keep separate records for AFL PCC

contributions. Accordingly, it may be impossible to recreate past reports correctly. However,

the SSFs should correct their past reports covered by the audit to the following extent: 1) CWA

PCC should list all amounts previously forwarded to AFL PCC on line 29 (other disbursements)

rather than on line 22 (transfers to affiliated committees); and 2) AFL PCC should list all

amounts previously received from CWA PCC as contributions and itemize those contributions to

the extent possible, rather than reporting the transmitted amount on line 12 (transfers from

affiliated committees). The itemized contributions should be reflected on Schedule A, and not as

memo entries. 11 C.F.R. § 102.6(c)(7). Given that these contributions are from individuals

through a collecting agent, they should be reflected as individual contributions on Schedule A.

11 C.F.R. § 102.6(c)(7). The report also proposes that AFL PCC may continue to report the

contributions collected from CWA PCC as lump sum transfers-in on Line 12 (Transfers From

Affiliated/Other Party Committees). Because Line 12 is for transfers from affiliated committees

and the SSFs are not affiliated, it is not appropriate to list the contributions forwarded by CWA

PCC as transfers-in on Line 12. This Office recommends revision to the proposed reports'

recommendations to the extent that they differ from the analysis in this subsection.