FEDERAL ELECTION COMMISSION

December 3, 1996

MEMORANDUM

TO:

FROM:

Ron M. Hams

Press Officer

Press Office

Robret J. Costa J

Assistant StaffDiret.:;;-r

Audit Division

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SUBJECT: Public Issuance ofthe Final Audit Report on the North Carolina

Democratic Victory Fund

Attached please find a copy oftile final audit rqJOIt and related documents on the

North Carolina Democratic Victory Fund which was approved by the Commission on

November 7.. 1996.

Infonnational copies ofthe report have been received by all perties involved and

the repon may be released to the public.

Attachment as stated

cc: Office ofGeneral Counsel

Office of Public Disclosure

Reports Analysis Division

FEe Library
REPORT OF THE AUDIT DIVISION

ON THE

North Carolina Democratic

Victory Fund

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tf) Approved November 7,1996

FEDERAL ELECTION COMMISSION

999 E STREET, N.W.

\\'ASHINGTON, D.C.
TABLE OF CONTENTS

NORTH CAROLINA DEMOCRATIC

VICTORY FUND

Page

Executive Smnmary

Final Audit Report 3

0

Background 3

-........

Findings 5

C'

~.r) Legal Analysis 35

N Transmittal to Committee 39

Chronology 41

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AR#93-58

FEDERAL ELECTIO' COMf\HSSION

FINAL AUDIT REPORT

ON THE

NORTH CAROLINA DEMOCRATIC VICTOR'" FUND

EXEClTIVE SlTI\IMAR\,1

The North Carolina Democratic Victory Fund (the Committee) c~is~ered with the

Federal Election COInn1ission on February 24.. 1983 and maintains its heaci~uaners in

Raleigh.. North Carolina. The audit "'"as conducted pursuant to 2 U.S.C. Section 438(b),

which states that the Commission may conduct audits of any political committee whose

reports fail to meet the threshold level of compliance set by the Commission. The

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

subsequent to the completion of fieldwork and later in an interim audit report. The

Comrnittee"s responses to those findings are included in this final audit report.

EXPENDIDJRES APPARENTLY MADE ON REBA'dE OE mE CLINTON!GQRE

CAMPAIGN - 2 U.S.C. §441a(d)(1) ; I I CFR §§110.7(a)(1) and (4): lOO.8(b)(18)(i), (ii),

(v). and (vii):

Goods lind Services PllrcltllSed Ap/HInlltly 011 Behalfoftlte

Clinton/Gore CllllfJHlign. The Audit staff identified expenditures totaling $135,733 that

appeared to have been made on behalf ofthe Clinton/Gore Campaign. In response to the

interim audit report.. the Committee stated that the expenditures for specific events at

which the President and Vice President made appearances were not campaign events but

rather represented exempt GOTV activi~·:. Other ex.penditures represented purchases of

campaign materials that were distributed by volunteers and were therefore also exempt.

However. the committee did not submit any documentation in support ofthese claims.

Direct Mail Program The Committee apparently used a commercial

vendor and commercial maihng hsts In conjunction "ith direct mail programs supponing

the Clinton/Gore campaign. Costs asSOCiated "ith the mailings totaled $177..217. In

response to the interim audit report the CommIttee stated that these expenditures were

exempt party expenditures because volunteers \\'ere used and the lists were developed by

the Committee. Ho,,·ever no documentatIon "'as submitted to support this claim.

Three fmdmgs (11 A.3 a .11 G and H I are not summanud herem

Lnder 11 CFR §§IOO 7(b)(9J, (15) and (1':) and IOO.8(b)( 10,. (16) and (18) cenam part)'

expendItures art exempt from the definatlon of··contributlon" and ··expendlture'· and are therefore

pemusslble and not subject to an~ hmlts

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PhDne B.II1 Progr.III. Under 11 CFR §tOO.8(b)(18)(v) a partysponsored GOTV phone bank on behalf of a Presidential nominet~ is exempt from the

contribution and expenditure limits if among other things~ the calls are made by

volunteers. not paid workers. The Committee operated at least three phone banks with

paid workers at a cost of approximately $ t69,000. The Committee claimed that paid

workers were used only for the generic script phase. but did not provide any

documentatioia l ' support tJ-j:i..

MISSTATEMENT OF FINANCIAL AcrnlD'aIEMIZr\TION OF CONTRIBUTIONS -

2 U.S.C. §434(b)(1). (2), (3). and (4). Reponed totals for receipts. disbursements and cash

on hand for calendar years 1991 and 1992 were misstated. The Committee also did not

itemize $29.619 in contributions from political committees and $227..432 in transfers

from the DNe and the Comminee·s non-federal account. In response to the interim audit

report. the Comminee filed amendments for each reporting peri<><L which materially

corrected these reponing deficiencies.

DISBURSEMEr-:rS TO YOLUl'7EERS USING MONEY ORDERS - 2 U.S.C.

§432(h)(1) and 11 CFR §102.IO. The Committee used money orders totaling $81 ..755 as

a means to account for payments to volunteers in lieu ofdisbursing currency. In response

to the interim audit repon. the Committee presented infonnation to show that this activity

\\'3.5 akin to petty cash disbursements documented by a wrinenjoumal.

DISCLOSURE Of OCCUPATION AND NAME Of EMPLOYER - 2 U.S.C.

§§434(b)(3) (A), 431(13)(A).. 432(i) and 11 CFR §104.7(b). The Committee failed to

disclose occupation and name of employer on its schedules ofitemized contributions. In

response to the interim audit report but several years after the contributions were

received.. the Comminee submined evidence of its efforts to obtain the infonnation and

filed amended Schedules A.

ApPAREl'T PROHIBITED COl'TRJBl710NS AND REPORTING Of DEBTS - 2

U.S.C. §§434(b)(8).. 441b(a). 441b(b)(:!). and 11 CFR §§116.3(b). 116.3(c) and 116.8(a).

The Comminee received a prohibited corporate contribution from Gordon and

Schwenkmeyer.. Inc. (GSI). The contribution resulted from GSI"s extension of credit.

which for the audit period totaled approximately 564.000. In addition the Committee did

not repon this debt to GSI on Schedule D. In response to the interim audit report.. the

Comminee filed amended Schedules D that materially disclosed the amounts owed to

GSI but indicated that the amounts are in dIspute.

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FEDERAL ELECTION COMMISSION

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REPORTOF THE AUDITDIVISION

ON

NORTH CAROUNA DEMOCRATIC VICTORY FUND

I. BACKGROUND

A. OVERVIEW

This repon is based on an audit ofthe North Carolina Democratic Victory

Fund (the Committee) undenaken by the Audit Division ofthe Federal Election

Commission in accordance with the provisions oftbe Federal Election Campaign Act of

1971. as amended (the Act). The audit was conducted pursuant to Section 438(b) ofTitle 2

ofthe United States Code which in pan. that the Commission may conduct audits

and field investigations ofany political commi11ee required to file a report under section

434 ofthis title. Prior to conducting any audit underthis subsectio~the CommiSS:\lD shall

perfonn an internal review ofreporIS filed by se!ccled committees to determine ifthe

repons filed by a particular committee meet the thIahold requirements for substantial

compliance with the Act.

The audit covered the period January I, 1991 through December 31, 1992.

The Committee reponed a beginning cash balance ofS123258; total receipts for the period

ofS3.296.949~ total disbursements fortbe period of$3232,730 and an ending cash balance

ofS187.447.J The Committee maintained four bank accounts for its federal activity during

this period. In addition. four bank accounts were maintained in conjunction with a

fundraising firm in California.

B. COMMITTEE ORCANIZATION

The Committee registered \\ith the Federal Election Commission on

February 24. 1983. The Comminee maintains its headquarters in Raleigh. ~orth Carolina.

Does not foot due to Commlnee mathematical errors and various reponmg errors. See Fmding 11.8.

All amounts have been rounded to the nearest dollar

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This report is based on documents and workpapers which support each orits

factual statements. They form part ofthe record upon which the Commission based its

decisions on the matters in the report and were available to the Commissioners and

appropriate stafffor review.

c. KEy PERSONNEL

During the audit period, the Treasurers ofthe Committee were:

o Mr. Banon W. Baldwin w,til January 29, 1991;

o Mr. James H. Young from January 29, 1991 through the end ofthe

audit period;

o The current Treasurer is Mr. Lyndo Tippett.

D. SCoPE

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Although in maintaining its contribution records, the Committee satisfied

the recordkeeping requirements of 11 CFR §I02.9, the Audit staffstesting ofcontributions

collected b}' a fundraising finn, which was acting as an agent on behalfofthe Committee,

was limited due to the lack ofthird party documentation; (i.e., copies ofcontributor checks

and contributor response devices). In addition. the testing ofdisbursements was limited

because the Audit staffcould not test for the proper negotiation ofmoney orders used for

election day expenses (see Finding II.C.).

the receipt ofcontributions from prohibited sources, such as tbo~ from

corporations or labor organizations;

The receipt ofcontributions or loans in excess ofthe statutory limitations;

The audit covered the following general categories:

proper disclosure of contributions fr~m individuals, political committee:

and other entities. to include the itemization of contributions when required,

,as well as, the completeness and accuracy ofthe information disclosed (see

Findings 11.0., E. and F.);

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:".. 2. "......,

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4. proper disclosure of disbursements including the itemization of

disbursements when required. as well as, the completeness and accuracy of

the infonnation disclosed;

5. proper disclosure of comminee debts and obligations;

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6. the accuracy oftotal reported receipts, disbursements and cash balances as

compared to committee bank records (see Finding II.B.);

7. adequate recordkeeping for committee transactions;

8. proper disclosure ofthe allocation of costs associated with activities

conducted jointly on behalf offederal and non-federal elections and

candidates (see Findings II.H. and C.)~ and

9. other audit procedures that were deemed necessary in the situation (see

Findings 11./\. and G.).

Unless specifically discussed below, no material non-compliance was

detected. It should be noted that the Commission may pursue any ofthe matters discussed

in this repon in an enforcement action.

If) II. FINDINGS AND RECOMMENDATIONS

A. EXPENDITURES MADE ON BEHALF OF THE CLll'TON/GORE CAl\tPAIGN

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Section 441a(d)(1) ofTitle 2 ofthe United States Code states, in part, that

the national committee of a political party and a Stale committee of a political party,

including any subordinate committee ofa State committee may make expenditures in

connection with the general election campaign of candidates ior Federal office subject to

the limitations contained within this subsection.2

Sections I 1O.7(aX I) and (4) ofTitle II ofthe Code of Federal Regulations

state that the national comminee of a political party may make expenditu..~in connection

with the general ejection campaign of any candidate for President ofthe United States

affiliated \\ith the pany. The national comminee of a political party may make

expenditures authorized by this section through any designated agent, including State and

subordinate pany committees.

Sections lOO.8(b)(18)(i).. (ii).. (\') and (vii) ofTitle 11 ofthe Code of Federal

Regulations state.. in part.. that payment by a State or local comminee of a political party of

the costs of voter registration and get-out-the-vote activities conducted by such comminee

on behalf of the Presidential and Vice Presidential nominee(s) ofthat part}' is not an

expenditure for the purpose ofinfluencing the election ofsuch candidates provided that the

following conditions are met:

2 The regulations cited and references thereto m thiS repan refer to regulations m effect for the period

Jll'9 t through 12'3 1/9~

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(i) Such payment is not for the costs incurred in connection with any

broadcasting, newspaper, magazine, billboard, direct mail, or similar

type of general f -hlic communication or political advertising. For

purposes ofthis section, the term "direct mai~" means any mailing(s)

by a commercial vendor or any mailing(s) made from commercial

lists.

(ii) The ponion of the costs ofsuch activities allocable to Federal

candidates is p~~id from contributions subject to the limitations 2nd

prohibitions ofthe Act.

(v) Payment ofthe costs incurred in the use of phone banks in

connection with voter registration and get-out-the-vote activities is

not an expenditure when such phone banks are operated by volunteer

workers. The use of paid professionals to design the phone bank

system. develop calling instructions and train supervisors js

permissible. The payment ofthe costs ofsuch professional services

is not an expenditure but shall be reponed as a disbursement in

accordance with 11 CFR 104.3.

(vii) Payments made froni iimds donated by a national committee ofa

political party to a State or IOCS'J party committee for voter

registration and get-out-the-vote activities shall not qualify under

this exemption. Rather. such funds shall be subject to the limitations

of2 U.S.C. 44la(d) and II CFR 110.7.

1. Introduction

The North Carolina Democratic pany conducted the North Carolina

'92 Coordinated Campaign (Ce). According to the plan overview contained in the

Committee's records. the ec's purpose "'as to manage the activities t~ reach and persuade

swing and democratic voters to tum out and vote for the democratic candidates. The three

major functions ofthe coordinated campaign were: (1) voter contact witt hswing" voters,

(2) voter registrationlGOT\' \ltith htraditionar' democratic voters. and (3) campaign

services.

The Committee managed the CC through one ofits federal accounts

entitled the Unity 92 Federal Account (the Unity account) and a nC'n-federal account

entitled N.C. Democratic Uruty 9:! Non-Federal Account. The total budgeted cost off.he

CC was $2.109.513. The Unity account \It'as funded by contributions from individuals,

political comminees. political organizations. and transfers received from both the

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Democratic National Committee (DNC~ and from the Committee's non-federal accounts.

One ofthe non-federal accounts (The Special ONC Transfer Account) u4Jed to fund the

Unity Account was the depository for transfers received from the DNC.

The ce's headquarters was located in Raleigh, North Carolina from

July 23, 1992 through December 11. 1992. The Clinton/Gore campaign sublet a portion of

the ec's office space from August 1. 1992 through November 20. 1992.

." Goods and Services Purchased Aggveotly OD Behalfofthe

Clipton/Gore Campah~n

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During audit fieldwork the Audit staff identified 63 expenditures

totaling $139.433 made by the CC which appeared to have been made on behalfofthe

Clinton/Gore campaign. Except for 53,700 in bank drafts received from the Clinton/Gore

campaign. no other transactions andlor materials originating from the Clinton/Gore

campaign were identified. For the purposes ofthis re'.'iew. since the $3,700 could not be

associated with a specific activity or any ofthe 63 expenditures discussed above, this

amount has been applied as an offset against the 5139,433 in expenditures made apparently

on behalf ofthe Clinton/Gore campaign, leaving a net total of5135.733.4

The Audit staffobtained a copy ofthe Democratic Coordinated Fall

Campaign Budge~ and the check register which detailed the ce's activity through October

28, 1992. The budget contained event expense codes and explanations ofthe event

expense codes. In many instances. the check register contained notations detailing the

purpose ofthe expenses. The Audit staff identified 6 event expense codes which appear to

be related to Clinton/Gore activities: #7150 - a Gore event at East Carolina University,

#7151 - October 4 Clinton Raleigh event. #1152 - October 12 Clinton Charlotte even~

#7154 - October 26 Clinton/Gore Bus Trip. #7400 - Gore Reception-Coor. Campaign, and

#7450 - a Gore Dinner-DNe. We were able to identify invoices associated with these

expense codes as well as additional invoices which were either billed to the Clinton/Gore

campaign or appeared to relate to expenses incurred on behalf ofthe Clinton/Gore

campaign.

Fifteen expenditures. totaling $40.796. were billed to the

Clinton/Gore campaign and paid by the CC. Items purchased included: several bus trips

to Clinton/Gore rallies, production services for a rally in Durham. mobile phone usage,

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See Section II.A.3.a.. Transfers Recel\ed from the ONe

According to the documentation made available to the Audit staff. the Commlnee was not

authonzed by the DNC under 11 CFR §110.7(a)(4) to make expenditures pursuant to 2 U.S.C.

§44la(d)( I). The DNC reported that S9.681.711 of Its S10.331.703 National pany Limit for the

1991 PreSidential election had been expended through September 30. 1994

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bulk mailing for the Clinton/Gore campai~ event phone charges, windbreakers for a

ClintoDlGore bus trip and buttons and bumper stickers.

The remaining 48 expenditures, totaling 598,637, were biUed to the

ce. Expenses which appeared to have been made on behalfofthe Clinton/Gore t'".ampaign

included: buses, meals, equipment rentals, production services, fireworks, a banner,

flowers. and postage.

During a conference with the current Committee Chair it was stated

that anything billed to the Clinton/Gore campaign which was paid by the CC was based

upon an agreement between the panies. No documentation has been provided to suppon

this statement.

In the interim audit report, the Audit staffrecommended that the

Committee provide the evidence which demonstrates that the expenditures totaling

S135.733 were not made on behalfofthe Clinton/Gore campaign. Such evidence should

include, but is not limited to. specific explanations from vendors detailing reasons why the

purchase of goods and services were invoiced to the Clinton/Gore campai~ why the

expense codes appeared to be for activities for the Clinton/Gore campaign and why the

other purchases of goods and services which appear to have been incurred for the benefit of

the Clinton/Gore campaign should not be considered expenditures on behalfofthe

Clinton/Gore campaign.

In response to the interim audit report the Committee's respoDS("

stated that:

"Each ofthe expenditures identified [by the Audit staft] represent

exempt e: ~nditures which can be generally grouped as follows:

·'Many ofthe itemized expenditures represent purchases by the

Committee of bumper stickers. buttons.. t-shins, jackets and fliers

distributed by volunteers. The purchase ofsuch materials distributed by

volunteers is exempt pursuant to 11 C.F.R §100.7(b)(15}, 11 C.F.R.

§100.8(b)(16).

"Numerous additional expenditures including ... the rental ofthe

North Carolina State Univelsity Faculty Club, expenses incurred with the

United States Postmaster. the rental of and expenses at the Sheraton

Imperial and other expenses incurred in connection with the 'Gore

Fundraiser' are fundraising expenses of the [CC] which conducted a

fundraiser at which Al Gore \\'as the featured guest. The event was not a

'Clinton-Gore' event.. but \\'as instead the principal fundraising event of

the Committee during the fall of 1992. [There] was no express advocacy

ofClinton-Gore and no fundraising in behalf ofClinton-Gore:'

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The response states further that the remaining expenses conducted

during the month ofOctober 1992 were incurred 3t GOTV rallies for the CC. The

response refers to GOT\~ rallies conducted on October 4th in Raleigh~ Oct?ber.12tb in

Charlotte and October 26 in Durham at the North Carolina Central University, in wbi~

Bill Clinton was the key speaker; however the response states that event was attended by

and conducted on behalf ofthe entire Democratic slate.

Finally. the Committee contends that the invoices which are either

designated or coded and marked Clinton-Gore:

..... reflects merely error or inadvertence on the part ofthe vendor or

comminee staff. For example, the printing ofClinton-Gore literature

obviously has been coded or invoiced a~ Clinton-Gore. but clearly the

printing ofsuch literature by the Party for distribution by volunteers is an

exempt activit)'. The fact that the Vice Presidential or Presidential

nominee was to be [in] attendance at an event may explain the naming of

the event or the coding ofthe expenditure. but does not establish that the

expenditure \\115 made for or in behalf oftt,e Clinton-Gore Committee.

The costs ofthese events were n01 paid with funds donated by the

National Committee. and thus the expenditures are exempt GOTV

activities,•.

The Comminee stated that much ofthe activity incurred by the CC

was conducted ~. volunteers and on behalf ofthe CC not the Clinton/Gore Committee;

however. the Committee did not provide any evidence that suppons these statements. For

example. the Comminee states that it has h •••examined available records _ through

cOWlsel and staff. has interviewed numerous volunteers and staffmembers involved..."

during the audit period. '{et. no documentation or a description of what was discussed in

the intervie"'s \\-as pro\;ded to suppon its position.

.-\Jthough the Committee's general commentary relating to the use of

volunteers to distribute campaign materials seems plausible. the Committee did not

demonstrate that this \\'as in fact the case. Consequently it appears that the expenditures

for the campaign materials were Incurred on behalf of the Clinton/Gore campaign.

Regarding the expenditures in relation to the specific events

mentioned by the Comnllttee. the infonnauon provided by the Comminee did not

demonstrate that the expenses ""ere not In connection \\ith the Clinton/Gore campaign.

Section 11 O.8( e)( 1) and (2)(ii) of Title II of the Code of Federal

Regulations state that a political party may make reimburse-ment for the expenses of a

candidate ,,'ho IS engaging in p~ -buIldlng activities. ,,;thout the payment being

considered a contribution to the candidate. and \\lthout the unreimbursed expense being

considered an expendIture countlng against the limitations as long as the event is a bona

fide party event or appearance. and no aspect ofthe solicitation for or the setting ofthe

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event and the remarks or activities ofthe candidate were for the purpose ofinfluencing the

candidate's nomination or election. Not withstanding those requirements, 8L event or

appearance occurring on or after January 1 ofthe year ofthe election for which the

individual is a candidate is presumptively for the purpose ofinfluencing the candidate's

election, and any contributions or expenditures are governed by the contribution and

expenditure limitations ofthis part 110. Further, Section 110.8(e)(2)(iii) states, in relevant

that the presumption in paragraph (ii) ofthis section may be rebutted by a showing to

the Commission that the appearance or event was ~' related.

The infonnation provided by the Committee in rebuttal to the

presumption is not persuasive for the following reasons:

a. The memo and purpose lines ofthe check and the check request

form for the expenditures incurred at the N.C. State University Faculty Club stated that

these expenditures were for a Gore fundraiser. The expenditures incurred for the U.S.

Postmaster and the Sheraton Imperial Hotel were assigned event expense codes [#7400 and

#7450] by the Committee as a Gore event.. not an event for the CC.

b. Three North Carolina Democratic Party Check Request Forms in

which the request for payment of goods and services was made by the Clinton/Gore

Campaign manager in North Carolina. These requests were approved by the director ofthe

CC and paid by the ce. Moreover, the event expense code [#7152] assigned to these

expenditw'es by the Comminee \\ClS entitled, "Oct. 12 Clinton Charlotte event.'"

c. An invoice billed to Clinton/Gore '92 stated, "production services

for Clinton/Gore campaign in Durham.. North Carolina-October 26, 1992." This invoice

was paid by the CC and ~ClS assigned by the Comminee an event expense code (#7154]

entitled, "Oct. 26 CG Bus Trip:" In addition. the Audit staffidentified two bank drafts

from the Clinton for President Comminee dated October 26.. 1992 and made payable to the

North Carolina Unity '92 which have noted on the purpose line hreimbursement for bus trip

expense·... Thus.. it appears that this event y;as incurred for the benefit ofthe Clinton/Gore

Committee.

d. Finally.. a letter dated November 9. 1992 from North Carolina

Central Universit)· addressed to the executive director ofthe Comminee requested

payments for an event held at the University on October 26. 199~. The lener states in

"The Clinton/Gore registration rally "'as held at North Carolina Central University on

October 26, 1992....1 met with the Clinton/Gore staff and explained that the University

could no~ absorb the cost for any activit), or event associated "ith the rally. 1was assured

by the t.~ 'ntonlGore staffthat the [Commlnee] would pay for the entire event.'" The letter

details the expenditures associated "1th the rally and ,,'ho the CC should pay. It should be

noted that the Audit staff could not detennlne if the Comminee paid these expenditures..

however.. there appears to be understanding berA'een the ClintOn/Gore staff and the CC that

the CC would absorb the costs asSOCiated \\';th this event.

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Based upon the invoices and event expense codes relating to

ClintonlGUfe activities, the request fonus written by the Clinton/Gore campaign manager

ofN.e. and approved by the director ofthe CC. the invoices describing the production

services for the Clinton/Gore rally events coded by the Committee as Clinton/Gore events

and the letter which states the Committee would pay for the entire event that was described

as a Clinton/Gore registration rally and not a CC event, it appears that the CC incurred

expenditures on behalfofthe Clinton/Gore Committee.

Further. regarding the Committee's last assenion that invoices coded

or marked Clinton/Gore were errors on the pan of vendors or Committee staff~ the

Committee did not, as requested in the interim audit report, provide any explanation from

vendors detailing reasons why the purchase ofgoods and services were invoiced to the

Clinton/Gore campaign.

Since the Committee's response to the interim report does not

contain documentation to the contrary, the Audit staff concludes that the $135,733 in goods

and services discussed above were purchased on behalfofthe Clinton/Gore campaign.

3. CoordiMled Campaim Actiyities which Appear to be Related to

Clinton/Gore Campaia Actiyities

c a. Transfers Rcccjycd &om the ONe

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As stated above, the CC conducted three main functions: (1)

voter contact with "swing" voters; (2) voter registrationlGOTV with ~onal"

democratic voters, and (3) campaign services. Such functions, ifconducted on behalfof

the Democratic Party's presidential nominee will not be considered an expenditure on

behalf ofthe nominee provided that certain conditions pursuant to 11 CFR §1OO.8(b)(18)

are met. Based on the infonnation made available. it appears cenain conditions were not

satisfied.

c-. The Audit staff identified seven transfers from the DNe

totaling S127,450 which were deposited or transferred into the Unity account. Five ofthe

seven transfers were from the DNC's General Fund5. The Audit staff was not able to

determine from which DNC account the remaining two transfers originated.. however.. thP.

transfers were reponed by the DNC Services Corporation.. a federal comminee. These

transfers comprised 6% ofthe budgeted cost ofthe CC. During October 1992.. six6

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According to leners from the ONe. the ONe's General Fund contains only contributions received

In accordance with the limnatlons and prohibitIons ofthe Federal Election Campaign Act.

Accordmg to notations on the Committee's bank records. one transfer from the DNe General Fund

an the amount of$25.000 was erroneously deposited anto the Nonh Carolana Judicial Campaign

Committee Accounl a non-federal account. and subsequently transferred to the Unity account on

November 9. 1992.

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transfers totaliDg S110,450 'Were deposited into the DNe Special Transfer Account and

subsequently 1raDsferred to the Unity account. The remaining 1raIlSfer in the amount of

St 7,000 was deposited directly into the Unity account on September 28, 1992.

For five ofthe ttansfers, the CC's records contained letters

from the DNe in which restrictions were placed on the use oftile funds: "... be used only

for general overhead and administrative expenses and ... that IlQ part ofthese funds be

used ... for the costs ofcampaign materials used in connection with activities on behalf

ofany candidate for federal office ... or the payment ofthe costs of any voter registration or

get-out-the-vote activity conducted on behalfof our prospective nominee for President or

any other candidate for federal office." In addition each letter stated that "...[the] State

party does not have any authority under §441 a(d) with respect to the Presidential election

campaign."

The deposit ofnational party fimds, totaling S127,450, into

the Unity account and the use offunds in the Unity Account to defray the costs of voter

registration. get-out-the-vote and campaign services may void the exemption at 11 CFR

§1OO.8(b)(18). Because a detailed breakdown for certain payments related to the

aforementioned programs \\'35 not available during the audi~ an analysis to identify the

magnitude ofnational party funds used to fund these programs was not performed prior to

the Comminee's receipt ofthe interim audit report. Infonnation necessary to perform an

analysis was requested in the interim repone

At the exit conf~ the Committee was provided with a

schedule ofthe transfers. The Comminee did not comment.

The interim audit report recommended that the Committee

provide explanations of why the deposit and use ofDNe monies.. totaling $127,450, did

not void the exemption under 11 CFR §1OO.8(b)(18) and photocopies ofdeposit tickets

prepared by Comminee personnel for all deposits into the Unity account during the months

ofOctober and November, 1992.

In response to the interim audit repon the Committee stated

that "[aln analysis ofthe accounts ofthe Comminee establishes that the average daily

balance during the month of October and November, 1992 exceeded $150..000 in each

month. On the dates in which deposits were made offunds transferred from the DNe, the

Committee'S bank balance in October exceeded $400,000 and in November exceeded

5200,000. A FIFO analysis would demonstrate, therefore.. that no transferred funds were

expended in any \\llY that would tend to void the exemption provided in 11 C.F.R.

§1OO.8(b)( 18)(vii)."

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Page 12, Approved 11/7/96
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The Committee's response included the infonnation

necessary for the Audit staff to analyze whether national party funds were used to fund the

exempt activities, and based on the information available. the Audit staff concludes that

national party funds were not used.

b. Direct Mail PrQ~

The Coordinated Campaign conducted a direct mail program

to identify s\\ring voters. "Persuasion" mail pieces \\'ere used tC' encourage these voters to

vote for the Democratic candidates.

The CC contracted with Gold Communications to develop a

direct mail voter contact program. Gold Communications developed eight mailings for the

Committee. The Audit staff obtained direct mail pieces and a summary of costs associated

with each mailing. In addition. we reviewed available mailing pennit documentation as

well as disbursement records to determine the total cost of each mailing. The CC was

responsible for depositing money for postage into the Committee's bulk mailing permit

account # 1006.

Ofthe eight rnailings reviewed. two mailings qualified as

activities exempt from the definitions of contribution and expenditure pursuant to 11 CFR

§§100.7(b)(9) and lOO.8(b)(IO). Three other mailings appeared to benefit the candidate for

Governor and did not mention any federal candidates.

Ofthe remaining mailings. all three appeared to benefit the

Clinton/Gore campaign. These rn <~ilings did not mention or have a picture ofthe

Democratic candidate, rather, these mailings described his opponent's record and his

position on various issues. It appeared that these mailings clearly tried to persuade the

voter towards the Democratic candidate and therefore. should be considered as

expenditures made on behalf ofthe Clinton/Gore campaign.

The Audit staff reviewed a memorandum and invoices

between Gold Communications and the CC. as well as printing and postage costs to

calculate a total cost per mailing. \\i'e calculated allocation percentages based on the

proponion ofspace devoted to each of the candidates ",ithin the mailings.i

Based on the infonnation made available during fieldwork, it

appeared that the use of a commercial vendor and the apparent use of mailings made from

commercial lists for these mailings voided the exemption under 11 CFR §1OO.8(b)(18).

The disbursements were reponed on Schedule H-4 and allocated based on the CC's ballot

composition ratio. 300/0 federal. 7~o non-federal

~UII'41'"

Pace ~proveC 11,''7/9£
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Therefore, it appeared the CC made expenditW'eS on behalfofthe Clinton/Gore campaign

totaling SI77;1.17.8

At the exit conference, the Audit staffrequested additional

infonnation regarding the direct mail expenditures. The Committee did not comment.

The interim audit report recommended that the Committee

provide documentation which demonstrates that the mailings were not made by a

commercial vendor; that the mailings were not made from commercial mailing lists; and

provide invoices or other infonnation generated by the vendor detailing the cost ofeach

mailing. The detailed cost infonnation for each mailing should include, but is not limited

to, the number of pieces mail~ the origination point of each mailing, the drop date(s) of

the mailings, postage cost., costs of mailing lists cost oflabels, if used, and any other

relevant costs associated with the mailings.

The Committee did not comply with all ofthe

recommendations ofthe interim audit report. Specifically, the Committee did not provide

invoices or other information generated by the vendor which detailed the cost ofeach

mailing; the number of pieces mailed. the origination point of each mailing, the drop

date(s).. postage cost. cost of mailing list used.. cost oflabels and any other relevant costs

associated with the mailings.

Rather. the Comminee stated in its response that:

·1he three mail pieces that are challenged by the Interim Report are

designed to promote the entire Democratic Party slate saying 'Vote

Democratic.. Vote For Change. 9••• [T)1le pieces do not mention the

Democratic nominees for President or Vice President. nor the

Democratic senatorial nominee.. and instead promote the concept of

voting 'Democratic.' The focus ofthe direct mail pieces which are

challenged is the distinction between the ideology ofthe Democratic

Party and the ideology ofthe Republican Party. The intent ofthe pieces

is to distinguish the Republican ideology from the interests ofswing

voters. Therefore.. the focus ofthe pieces is on economic issues

including unemployment and tax matters so as to elicit the interest of

middle class ·swing voters" in the nominees ofthe Democratic Pany.

There is no express advocacy ofthe Clinton-Gore ticket. The express

advocacy is in behalf ofthe entire Democratic slate premised upon the

identification ofthe interest ofthose voters with the ideology ofthe

nominees ofthe ~orth Carolina Democratic Part)'.

8 The Audit staff dad not perform is iT.odlfied FIFO analySts to associate the deposit of party funds

With the payment of direct mail or phone bank expenses pnor to issuance ofthe interim audit report.

AXMCIJDC5fU 1114'"

Pace 1~, Approved 11/7/96
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Min addition ... is the involvement ofvolunteers in the sorting,

packing and delivery ofthe direct mail pieces.... Gold Communications

developed the concepts for the mail pieces, which work was done in

conjUDCtion with the Democratic Party staff. The lists ofnames and

addresses used was compiled &om files in each ofNorth Carolina's 100

CO\Ulties by the Pany. The lists collected were then collated and

assembled into a unitied fonnat.

"The (CC] procured space in which volunteers soned. bundled. and

bagged mail by zip code for purposes of obtaining efficient bulk mail

delivery. Volunteers then delivered the mail into the custody ofthe

United States Postal Service."~

The Audit staff acknowledges that the pieces in question did

not name any ofthe candidates on the Democratic slate. One piece included references to

George Bush's middle class tax policies. and also included a picture and references to the

Republican candidate for the U.S. Senate. The second piece included references to George

Bush's handling of economic issues. Both pieces contain language urging the reader to

·Vote Democratic - \'ote For Change."

In addition. the Committee claims to have used a volunteer

effon to mail these pieces and to have produced the mailing lists in-bouse. However, aside

from the statements made in the Committee's response, the Committc..~ did not provide any

other documentation that supports its position. Moreover, a memorandum from the direct

mail vendor to the Comminee detailing the costs ofthe program states. in pan. "That

leaves $196.000 to cover list costs and remaining production costs.... We can review the

accOW1ting next weeK 3fter the exact postage and list CMtS can be pinned down." Based on

these statements. it appears that direct mailing vendor J'W'Chased lists for the mailings.

Since the Comminee's response to the interim audit report

did not contain documentation that the direct mail \\-as not processed by a commercial

vendor or the mailings made from commercial lists. the Audit staff concludes that the

exemption under 11 CFR §100.8(b)(18) y:as voided. Therefore. the CC made expenditures

on behalf ofthe Clinton/Gore campaign totaling S177.217.

c. Phone Bank PrQ~ram

During fieldwork the Audit staff obtained phone bank

documentation. three phone scripts. pa)Toll records. contracts and other relevant

disbursement records regarding the phone bank program. Based upon the available

records. it appeared the CC operated at least three phone bank operations with paid

workers and. in addition. entered into a contract with a vendor to provide phone calling

services. The total identified costs of these operations were S168.934. Due to a lack of

documentation. we were not able to associate any ofthe scripts with any of the phone bank

operations.

~Aall'.''''

Paoe 15, Approved 11/7/96
Two ofthe three scripts mentioned Bill Clinton as pan of

their get-out-tbe-vote message. The third script did not mention any candidates.

During fieldwork and at the exit conference we requested

Committee officials to provide more documentation associated with the phone bank

operations. At the time no additional infonnation detailing which script was used with

which phone bank had been provided by the Committee. The use of paid workers to

conduct the phone bank operations voided the exemption under 11 CFR §100.8(b)(18).

At the exit conference, the Committee was provided with a

schedule o(the phone bank costs discussed above. The Committee did not commenL

In the interim audit report, the Audit staffrecommended that

the Committee provide the following:

c

a)

b)

c)

d)

evidence to demonstrate why the use of paid phone bank employees did not

-void the exemption provided under 11 CFR §1OO.8(b)(18);

a detailed analysis of all phone bank costs, including docwnentation which

supports the costs ofthe GOlV phase &nd costs associated with other

discreet phases. ifany. based on the number ofcalls made for each phase.

For phases ofthe program that utilized more thaD one script, the costs

should be allocated to each script~

infonnation detailing 00\" the results ofthe GOlV phase and other discreet

phases. if any, were utiltzed: and

information which correlates each paid caller t~ a specific script amd to the

location from which the calls were made.

The Comminee did not con~i=' '.. '\i~:: ali of tile

recommendations presented in the interim audit repone Sp'- .iically. the Committee did

not provide a detailed analysis of all phone bank costs. or d· .;:..unentatlon which supports

the costs oCthe GOTV phase and costs associated ,,~~'" Ij~:.~~' U.:.screet phases. if an)", based

on the number of calls made for each phase. Furtht:r :l,--' ;".f{\nnation \I;'RS provided which

detailed how the results ofthe GOT\' phase and or~e!' r~ weiC utilized and which .

correlates each paid caller to a specific script and t\J the loca11on from which the calls were

made.

Rather. the Comminee stated in its response that:

UThe (CC] organized and operated both volunteer and paid phone

banks focused on its GOn' efforts. The GOTV efforts included the

identification of Democratic voters and pre.election day and election day

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Page 16, Approved 11/7/96
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calls to tum out voters. In "dition, certain calling was directed to the

generation ofexcitement among volunteers, election day workers and

prospective voters coiDcident with GOlV rallies conducted in the State.

"... This (GOlV] paid phone banking used a purely generic script

to remind voters ofthe upcoming election and to identify voters needing

a ride on election day to their polling place. Voters were encouraged to

vote a straight Democratic ticket. No candidate was identified by name...

"Ofthe substantial expenditures identified by the Commission for

paid phone banks. only phone banking conducted on election day utilized

a script which identified Bill Clinton and in some instances AI Gore in

the GOT\' phone calls...

UAn analysis oftbese charges on a per diem basis suggests that

should the Commission determine the phone bank scripts from election

day not to contain a merely incidental reference to the Democratic

Presidential nominee then the total expenditures for such election day

calling would not likely exceed 8-100At ofthe total expenditures for paid

phone bank.

I>4An examination ofthe three scripts shows that the pre-election

day script is completely generic and contains only a GOTV and Vote

Democratic message. The remaining two scripts are election day scripts

and only those scripts identify a Democratic candidate.

"The Audit Staffhas id,."tified as expenditures on behalfof

Clinton-Gore, the costs ofa paid phone bank conducted to stir

enthusiasm for the GOlV rally in Durham. As is set forth above, the

rally was designed to motivate volunteers. election day workers and

prospective voters by encouraging participation in a GOlV rally held in

Durham on October 26, 1992. No script has been located for this phone

banle"

As stated above the Audit staff previously noted that two of

the three scripts identified ClintonlGore~ however due to the lack ofinfonnation provided

we were not able to identify which costs were associated with each program. Also

addressed by the Comminee is its use of paid workers. The Committee contends that the

paid phone bank workers performed services for the generic script phase only, however, no

documentation was provided by the Committee to suppon this assenion. Therefore, the

exemption under 11 CFR §100.8(b)(18) was voided by the use of paid callers.

Although the Committee contends that only between 8-100/0

ofthe total phone bank expenditures identified could relate to Clinton/Gore it did not

provide any documentation that would have allowed the Audit staffto independently verify

Page 17, Approved 11/7/96

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that percentage or otherwise calculate what portion ofthe S168,934 in costs related to the

phone banks were paid on behalf ofthc Clinton/Gore campaign.

B. MISSTATEMENT OF FINANCIAL Acnvrrv

Sections 434(b)(1), (2), and (4) ofTitJe 2 ofthe United States Code state, in

relevant part, that each report shall disclose the amount ofcash on hand at the beginning of

the reponing period and the total amount of all receipts and disbursements received or

made during the reporting period and the calendar year.

The Audit staffs reconciliation ofbank activity to the Committee's

disclosure reports filed from January 1, 1991 through December 31, 1992 indicated a

material misstatement offinancial activity for calendar years 1991 and 1992.

I. Calendar Year J991

Reponed beginning cash on hand was overstated by 529..J87 when

compared to the correct reponable beginning cash on hand.

a. Receipts

c

.,.... ... <

The Committee's reported receipts were understated by

S13,115. The misstatement ofreceipts resulted from the Committee reponing three

transfers. totaling S14..110, twice; DOt reponing receipts &om political committeestotaling

$4,933.. a transfer of$4,000. receipts deposited into the federal accounts totaIiDa $7,819,

receipts from the Committee's telemarketing firm totaling 59.473; and an uuexplaiDed

difference of51,000.

b. Disbursements

The misstatement ofdisbursements resulted from the

Committee not reponing disbursements in the amount of525,947 to the Committee's

telemarketing firm.

c. Cash OD Hand

The reponed ending cash on hand balance at December 31,

1991 was overstated by a net amount of $42.020. This resulted from the misstatements

detailed above.

d. Allocable Expenses Paid by a Non-Federal Account

During the first three months of 1991, the Committee paid

allocable expenses from a non-federal account titled, N.C. Democratic Executive

Committee account (DEC-NF). A revie\\' of disbursements made from the DEC-NF

¥NC'DDlIIPU" ,.,..

Paoe 18, Approved 11/7/96
17

indicated that payments totaling 5107,728 were made during this period (see Finding 11.0.•

Allocation of Administrative Expenses).

The Committee should have reported the allocable expenses

as memo entries on Schedule H-4 (Joint FederallNon-Federal Activity Schedule).

11,

..,

... Calendar Year 1Q9;;

a. Receipts

The Committee's reported receipts were understated by

$125,743. The misstatement ofreceipts resulted from the Conunittee over reporting the

return of unused money orders by $315; reporting only as memo entries (i.e., the amount

was not included in reported totals) in-kind contributions totaling $5.]70; reporting a

contribution which did not clear the Committee's bank accounts in the amount of52,000;

not reporting an in-kind contribution in the amount of $21.000. contributions from political

committees totaling S24.686. a transfer from one ofthe Committee's non-federal accounts

for $150. receipts from the Committee's federal accounts totaling $20.597. and receipts

from the Committee's telemarketing finn in the amount of$56.255.

b. Disbursement.~

c

c

The Committee's reponed disbursements were understated

by $169.394. The misstatement resulted from the Committee reporting only as memo

entries the value ofin-kind contributions totaling 55.370; not reporting the value of a

521.000 in-kind conuibution~ under reponing fees paid to the Committee's telemarketing

firm totaling 558.312; a math error which caused a under reponed amount of$88.363; and

miscellaneous other errors totaling $3.65 i.

c. Cash 00 Hand

C". The Comminee reponed an ending cash on hand balance on

December 31. 1992 of S187.447. The Audit staff concluded that this was overstated by a

net amount of $85.641. which resulted from the misstatements detailed above.

At the exit conference the Comminee was provided with

schedules detailing the misstatements discussed above. The Committee did not comment

on the issues discussed above.

In the intenm audit report. the Audit staff recommended that

the Comminee file amended disclosure repons for calendar year 1991 and 1992 to correct

the misstatements discussed above. \\'lth regard to section l.d.. Allocable Expenses Paid

by a Non-Federal Account. the .~udlt staff recommended the Comminee file Schedules

H-4 listing as memo entries the allocable expenses totaling $107.728.

~UII'.I""

PaOE: ., c ... -, Approved 11/7/96
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In response to the interim audit report, the Committee filed

amended reports for calendar years 1991 and 1992 that materially corrected the

misstatements. In addition, the Committee filed Schedules H-4 that correctly disclosed as

memo entries the allocable administrative expenses.

c. DISBURSEMENTS TO VOLUNTEERS USING MONEY ORDERS

Section 432(h)( 1) ofTitle :! of the Unit~d States Code states" in part, that

each political committee shall designate one or more ~t?te banks. federally chartered

depository institutions. or depository institutions the deposits or accounts of which are

insured by the Federal Deposit Insurance Corporatio~ or the National Credit Union

Administration, as its campaign depository or depositories. Each political committee shall

maintain at least one checking account and such other accounts as the committee

determines at a depository designated by such committee. All receipts received by such

committee shall be deposited in such accounts. No disbursements may be made other than

petty cash disbursements under paragraph (2) by such committee except by check drawn

on such accounts in accordance with this section.

Section 102.10 ofTitle 11 ofthe Code of Federal Regulations states" that all

disbursements by a political committee.. except for disbursements from the petty cash fund

under 1i CFR 102.11. shall be made by check or similar draft drawn on account(s) .

established at the committee's campaign depository or depositories under 11 CFR part 103.

The Audit staff identified 3..033 money orders purchased by the Committee

through the Unity account.. at a cost of$2 each. on October 30. and November 2, 1992.

The aggregate value ofthese bearer instruments. denominated in amounts ofSIS, $20, 535,

and $55" was $81,,755. According to a Committee official, the money orders were used as

a means to account for payments to volunteers in lieu of disbursing currency.

Based on our analysis of documentation provided. blank money orders were

forwarded to the individual responsible for paying volunteers who performed services

relative to the Weekend and Election Day door hanger program. Several forms were used

as part ofthe program: (a) instruction sheets on which were recorded the money orders

sent to the individuals responsible for disbursing the instruments. as well as. guidance

related to accounting for all money orders. and (b) a \.olunteer Reimbursement Request to

be used to record the name. address. social security number. and amount paid.9

According to the instruction sheets. the individual responsible was to

forn'ard the Volunteer Reimbursement Request fonns. carbon copies of the money orders

issued to the volunteers. and unused money orders to Comminee headquaners the day after

the election.

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9 There was no prOVIsion for the signature of the volunteer to whom the money orderis) was payable.

~AJIIII.I'"

Pa~e -; - ......;, ~~roveC 11/7/96
19

Our review ofthis activity indicated that approximately 2,500 carbon copies

were maintaine~ along with the Volunteer Reimbursement Request fonns. Seventy

unused money orders, totaling $2,830, were deposited into the Committee's Unity account

on December 7, 1992. As to the reporting ofthis activity, the purchases ofthe money

orders were itemized on Schedule H-4. However. no reporting occurred relative to the

named recipients ofthe money orders.

Although cenain ~cords \\'ere maintained~ as described above. the Audit

staff v,1\S not able to review the actual instruments for proper endorsement. Unlike checks

issued 0-' tt--: r:omminee's accounts, the negotiated money orders were not returned to the

CO~~",:~L",

When these issues were discussed with Comminee officials, the Counsel to

the Committee stated the money orders were used to get away from the tradition of using

cash for volunteers on election day.

In the interim audit report~ the Audit staffrecommended the Comminee:

submit documentation to demonstrate that the use of money orders. as described above.

satisfied the requirements of2 U.S.C. §432(h)(1) and 11 CFR §102.10; and file an

amendment to its original filings to disclose a description ofthe program to which the

tranSactions at issue relate, the number ofmoney orders issued, the aggregate value,

number ofrecipients.. and purposes for such disbursements.

In response to the interim audit repo~ the Committee stated that "... the

North Carolina Democratic PaJ1)·. in an effort to increase the accountability and accuracy

ofthe disbursement of election day expense monies and the reponing ofsuch expense

monies. determined to use bank. money orders purchased prior to election day and

disseminated to authorized individuals for distribution on election day in accordance with

expenses incurred by election day volunteers.

hA money order is a cash equivalent and the Committee has complied with

the record keeping requirements applicable to petty cash disbursements as provided in 11

C.F.R. §10:!.11:~ The Comminee provided examples of documentation that was

previously reviewed during audit field work.

Although the transactions at issue involved $8:!~OOO in money orders. the

Comminee's disbursement of money orders to volunteers in denominated amounts ofS15,

$20, S35 and $55 in conjunction \\ith its use ofu\J'olunteer Reimbursement Requesf· fonns

is akin to petty cash disbursements documented by a ",Tinen journal. See 11 CFR §102.11.

The Committee also filed an amend~d Schedule B that stated the nature ofthe transactions,

the number of money orders issued. their aggregate value and purposes for such

disbursements.

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D. DISCLOStJRE OF OCCUPATION AND NAME OF EMPLOYER

Section 434(b)(3)(A) ofTitle 2 ofthe United States Code states that each

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

who makes a contribution to the reponing 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 amoWlt of any such 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 ad~and the

occupation ofsuch individual, as well as the name of his or her employer.

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

the treasmer of a political committee shows that best efforts have been used to obtain,

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

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

Section t04.7(b) ofTitJe 11 ofthe Code ofFedera1 Regulations states. in

pan. that \\ith regard to reponing the identification of each person whose contribution(s) to

the comminee and its affiliated committees aggregate in excess of5200 in :~ :-alendar year

(pursuant to 11 CFR 104.3(a)(4», the treasurer and the committee will not be ~edto

have exercised best effons to obtain the required infonnation unless he or she has made at

least one effort per solicitation either by a written request or by an oral request documented

in writing to obtain such infonnation from the conttibutor. Such effort shall consist ofa

clear request for the information (i.c... namc" mailing address, occupatio~ and name of

employer) which request infonns the contributor that the reporting ofsucb information is

required by law.

The Audit staff conducted a sample review of conttibutions from

individuals and identified a 1()()O/o error rate relative to the itemization of occupation and

name of employer, Upon funher revie,,'. it was noted that the occupation and name of

employer was not itemized on Schedules A (itemized receipts) for any ofthe 649

contributors listed on disclosure repons filed dunng the audit period. The total dollar

amount of contributions required to be itemized ""as $383..297.

The Audit staff examined two types ofsolicitations used by the Committee.

One device. used in connection with the Victory Gala event did not contain a request for

occupation and name of employer; nor did It contain language stating the reporting ofsuch

information is required by la",', The other device which apparently was used for

membership solicitations did contain a request for occupation and name of employer;

however. it did not contain language stating the reponing of such tnformation is required

by la\\',

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Paoe 22, ~~roveC 11/7/96
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At the exit conference the Committee was infonned that disclosure repons

filed for 1991-1992 did not contain occupation and name of employer infonnation.

Committee officials stated they did not know why occupation or name ofemployer was not

disclosed during the audit period.

In the interim audit report.. the Audit staff recommended that the Committee

provide evidence to demonstrate that it exercised best efforts; or absent such a showing9

contact all contributors who have not provided the required contributor infonnation9

provide copies of responses to these requests.. and file amended Schedules A to correct the

public record. Such request to contributors.. if necessary.. ~'as to include language that

Federal law requires the reponing ofsuch information.

In response to the interim audit repon.. the Committee provided

documentation which demonstrated that the Committee attempted to contact most ofthe

individuals that were required to disclose this infonnation. Documentation included:

response devices returned by contributors with the required information: copies ofletters

returned to the Committee \\;thout the required infonnation because contributor addresses

were no longer valid.; and copies ofletters dated September 1.. 1995 sent to contributors

requesting the infonnation but no response \\-as returned to the Committee. In addition~ the

Comminee provided the required information for contributors that it had on its receipt data

base.

lnfonnation otitained by the Committee was reported on amended

Schedules A. In regard to the letters sent to contributors, the requests asked for the

required information and included language infonning the contributor that the reporting of

such infonnation is required by law. The requests for required information and subsequent

reponing of infonnation obtained occUJ'1'ed several years after the dates ofthe contr~!JutiODS

in question.

E. ITEMIZATIO~ OF COSTRJBl"IO~S FROM POLITICAL. COMMlnEES

Section 434(b)( 3) of Title: of the United States Code.. states. in relevant

pans. that each repon under this section shall disc lose the identification of each political

comminee ""hlCh makes a contribution to the reponing comminee during the reponing

period.. together "'ith the date and amount of any such contribution: and of each affiliated

comminee which makes a transfer to the reponIng comminee during the reponing period

and.. ~'here the reponing committee is a political party committee. each transfer of funds to

the reporting conuulttee from another politlcal party commlnee.. regardless of whether such

comminees are affiliated. together "'ith the date and amount of such transfer.

Section 431 (13) of Tlt1e : ofthe United States Code states that the tenn

"identification" means: in the case of any person. other than an individual. the full name

and address of such person.

~~II'.I'"

PaCE: ~~!"oved 11'7/9E
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The Audit staffreviewed contributions &om politicalltCtion committees,

party commi~and other political committees and identi~~contributions totaling

$29,619 (9.56% oftbe total amount ofsuch contributioDS) -mcb were not itemized. The

value ofthese contributions was also not included in the Committee's f "1'Orted totals (see

Finding n.B., Misstatement ofFinancial Activity).

At the exit conference the Committee was provided with a schedule

summarizing the reporting errors tut did not comment on the issues discussed above.

In the interim audit report. the Audit staffrecommended the Committee file

Schedules A to correct the public record. In its response, the Committee filed amended

Schedules A that materially corrected the issues discussed above.

F. ITEMIZATION OF TRANSFERS

c

Section 434(b)(3)(D) ofTitle 2 ofthe United States Code states that each

repon under this section shall disclose the identification of each affiliated committee which

makes a tranSfer to the reporting committee during the reponing period and, where the

reponing committee is a political party committee, each transfer offunds to the reponing

committee from another political party committee, regardless ofwhether such committees

are affiliated~ together with the date and amount ofsuch transfer.

The Audit staffreviewed transfers deposited into the Committee's federal

accounts and identified 4 transfers totaling $227,432 .0 which lNeIe DOt itemized as

required on either Schedule A or Schedule l-l·~. ComprisiDg tim _ 'Were: $4,000 in

proceeds from a joint fundraising effort between the Committee 8DcI the DNC; a S21,000

in-kind contribution from the ONC; a S150 transfer tiom the Committee's non-federal

acCOWlt: and a $202.282 transfer to fund allocable expenses.

At the exit conference. the Committee was provided with schedules

detailing the items discussed above but did not comment on this issue.

In the interim audit repon. the Audit staffrecommended the Committee file

Schedules A and Schedules H-~ to amend its disclosure repons to itemize the above noted

transfers. In response.. the Committee filed Schedules A and Schedules H-3 that materially

corrected the discrepancies noted above.

10 The value ofthree transfers. totahng 525.1 SO. was not included in the Committee's reponed totals.

See Flndmg II.B,. Misstatement of FIRancla) Activity. The remaining transfer in the amount of

5202.282. was reponed by the Committee on the detail summary page of the year end 1992 report.

but thiS transfer was not itemized as reqUired on Schedule H-) (Transfers from Non..Federal

Accounts)

~~III.I'"

Page 2~, Approved 11/7/96
'0

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.'.....

23

G. ALLOCATION OF ADMINISTRATIVE EXPENSES

Section 106.5(d)(1) ofTitle 11 ofthe Code of Federal Regulations requires

that all state and local party committees allocate their administrative expenses and costs of

generic voter drives by the ballot composition method described in paragraphs (d)(1Xi) and

(ii) ofthis section.

Section I06.5tg)(l) of Title 11 ofthe Code of Federal Regulations provides

that comminees that have established separate federal and non-federal accounts under 11

CFR 10~.5 shall pay the expenses ofjoint federal and non-federal activities as follows: (i)

pay the entire amount of an allocable expense from its federal account and transfer funds

from its non-federal account to cover the non-federal share ofthat allocable expense; or (ii)

establish a separate allocation account into which funds from its federal and non-federal

accounts shall be deposited solely for the purpose of paying the allocable expenses ofjoint

federal and non-federal activities. Once a comminee has established a separate allocation

account for this purpose, all allocable expenses shall be paid from that account for as long

as the account ic; maintained.

The Comminee paid most ofIts administrative expenses from the Unity

account. a federal account which appeared to operate in accordance with 11 CFR

§106.5lg)( 1)(i). Disbursements from this account were reponed on Schedule H-4 (Joint

FederallNon-Federal Activity). According to Schedule H-l (Method of Allocation for

Shared Federal and Non-Federal Administrative Expenses and Generic Voter Drive Costs)

filed by the C0mminee. the ballot composition ratio was 3OO/o federal and 7()OAt non-federal

regarding the allocation of administrative and generic voter drive costs.

However, from January 1.1991 through March 31.1991. the Audit

noted that no transfers from the Comminee's non-federal accounts were made to the Unity

account. a federal account, to pay for administrative expenses pursuant to 11 CFR

§106.5(g)( 1). During this period its administrative expenses were paid from a non-federal

account titled. N.C. Democratic Executive Comrninee (DEC-NF).

The Audit staff reviewed check copies and a payroll journal to detennine

the total amount of administrative expenses paid from the DEC-NF account during the

period January 1. 1991 through March 31. 1991. The total amount of admiuistrative

expenses identified was $107.728. 11

Rather than paying expenses from the DEC-NF. the Comminee should have

paid all shared expenses from the Unity account and then sought reimbursement from the

DEC-NF account for its allocable share of expenses in accordance v.;th 11 CFR

§106.5lg)( 1).

\

I

11 The expenses. totaling S107 .i~8. ~ere not disclosed on the Committee's reports mltlally filed. See

Fmdmg 11.8., MIsstatement of Fananclal ACtJV1~

~~rnved 11/7/96
c

24

We also determined that $23,999 in administrative expenses were paid from

a federal account titl~ N.C. Democratic Executive Committee Federal Account (DEC-F)"

These disbursements '-\"ere itemized on Schedule B (Operating Expenditures). The Audit

staff identified administrative expenses paid from January 1, 1991 through March 31, 1991

totaling S131.727.

Pursuant to the hallot composition method at 11 CFR §106.5(d)(1) the

federal share for this period was $39.518. This \\-as determined by multiplying the federal

allocation ratio (30%) by the total amount of administrative expenses. Hence, it appears

that the non-federal accounts over paid their share of administrative expenses by SIS,519.

This was calculated by subtracting the amount of administrative expenses which were paid

from federal accounts from the federal share of administrative expenses for this period.

For the remainder of 1991, it appeared that the federal account(s) overpaid its share of

allocable expense by $4,416.

For 1992. the Audit staff noted that the Comminee did not make any

transfers from its non·federal accounts to the Unity (allocation) account to pay for

administrative expenses incurred prior to June. Prior to June, the administrative expenses

were paid from the DEC·F. These expenses were reported on Schedule B.

It should be noted that for calendar year 1992, the non-federal share of

administrative expenses calculated by the Audit staff totaled 51,423,951. However~ only

S1,365.021 was actually transferred from non-federal accounts to the Unity account to pay

the administrative expenses. Administrative expenses were paid from the Committee's

federal accounts which exceeded the federal allocable amount by 558,930.

At the exit conference. the Committee was provided with schedules

detailing the matters discussed above but did not comment on this maner.

In the intf!'rim audit report~ the Audit staff recommended no further action

because the federal accounts over paid their share of 1992 administrative expenses by

S58~930 versus the federal u!lder payment of$11.103 in 1991.

H. DISCLOSURE OF EXPENSE CLASSIFICATIOJl\

Section 104.10(b)(4) ofTitle 11 ofthe Code of Federal Regulations states,

in relevant part, that a political comminee that pays allocable expenses in accordance with

11 CFR 106.5(g) or i 06.6(e) shall also report each disbursement from its federal account or

its separate allocation account in payment for a joint federal and non-federal expense or

activity. Ifthe disbursement includes payment for the allocable costs of more than one

activity the committee shall itemize the disbursement~ sho\\1ng the amounts designated for

payment of administrative expenses and generic voter drives~ and for each fund-raising

program or exempt activity, as described in 11 CFR 106.5(a)(2) or l06.6(b).

~""111'1'"

Paae /

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2S

The Audit staffs sample review ofdisbursements reported on Schedule 8-4

resulted in an etrOr rate of97% relative to the omission of expense classifications. Except

for the mid year 1991 disclosure repo~ the Committee did not disclose expense

classifications on Schedule H-4.12

However, the expenditures disclosed on Schedule H-4 were allocated 300/0

federal and 700/0 non-federal which is equivalent to the Committee's ballot composition

ratio reported on Schedule H-l. Many ofthe expenses reponed on Schedule H-4 were for

administrative costs for which the ballot composition ratio is appropriate.

At the exit conference, the Committee was informed ofthe discrepancies

noted above. Besides asking several questions in regards to the Schedule H-4 the

Committee did not comment.

In the interim audit report the Audit staffrecommended the Committee

adopt procedures to preclude a reoccurrence in the future. In response, the Committee

stated that it h ••• has adopted procedures to correctly disclose expense classification.n

Since the Committee did not submit written procedures. the Audit staffreviewed Schedules

H-4 filed after the Committee's receipt ofthe interim report and found that the Committee

did not consistently check the boxes on the reports which indicate the expenses

classifications. Therefore, the Committee has not complied with the recommendation of

the interim report.

I. TRANSACJ10NS WITH GoRDON AND SCHwENKMEYER, INC.

1. B1ckamagd

, .•

Gordon and Schwenkmeyer.lnc. r'GSI") is a telemarketing firm

located in EI Segundo, California. Its two principals, Mr. Michael Gordon and Ms. Kris

Schwenkmeyer. are a fonner Executive and Political Director, respectively~ for the

California Democratic Party (COP). They left the CDP in 1985 and incorporated their

telemarketing firm.

For most ofthe audit period GSI operated under a contract with the

Committee which was effective from June 12. 1991 through June 12. 1993.13 This

contract specified some ofthe services GSI was to provide the Comminee and the

compensation rates to be paid to GSI. GSl worked from phone lists and solicited

contributions for the Committee. There were two compensation rates. one for the

solicitation of previous donors and a lower rate for the solicitation of prospective donors.

12 For expen~ clwslficatlon. disclosure entails checkmg the applicable category box

(administrative/voter dnve. fundralsang. exempt or dtreet candidate suppon)

There was apparently a similar pnor agreement which was not provided to the Audit staff

~UIII.I""

Page 27, Approved 11/7/96
26

As outlined in the conttaet, OSI opened a custodial checking 8CC01.U1t(S) into which all

donations received through a telephone solicitation program(s) were deposited. aSI served

IS custodian ofthe KCOUDt(S).

OSI maintained custodial accounts for three federal telemarketing

programs conducted during the audit period.14 The programs were identified as NCO,

NC2 and NC3. According to an April 15. 1993 Gordon apd Sc;bwmkmeycr Pmamm

Summit)' on BdMlf aCtbe North CarpljnA Democratic PartY (Program Smnmary) provided

by Gst the North Carolina Democratic Party's fundraising program was divided into three

parts. Pan one was dedicated to increasing the net raised from existing telemarketing

donors; the second part was directed toward progressive donors throughout the country;

and the third part was geared toward developing new donors from the democratic voter

file.

According to the agreemen~the contributions received through a

telephone solicitation program were deposited into the custodial account conesponding to

the program which generated the contribution. GSI accounted for each program separately

and did not use profits from one program to pay the operating shortfall ofanother. Funds

from the custodial accounts were transferred to GS}'s corporate account, and on occasion,

GSI transferred funds to the custodial account from its corporate account.

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The NC3 program, described above as the third part ofthe

Committee's fundrajsing program, involved prospecting which is the process by which OSI

expands the contributor base for its customer, in this case ~y developing new donors from

the democratic voter file. GSI contends that prospecting is made necessary because

"[aJpproximately 15% ofthe donor file becomes inactive each year. Therefore to sustain

and expand the telemarketing program., new donors need to be developed." The Audit staff

calculated that the NC3 program created a debt.. approximating 564,,000, to GSI over the

audit period.IS The debt resulted because expenses consistently exceeded revenue and no

up front funding or other payment \\1lS provided by the Committee. According to the

Program Summary, GSI stated that:

.. initial Pro3"J)ect solicitation ofthe wgeted households was going to

lose approximately S10 for every donor developed.. however, once the

donor had been developed.. the profits from the first three and half

resolicitations ofthe donor would payoffthe initial debt. Once the debt

was repaid. the Party would then receive all future profits from the

continued resolicitation. From a program standpoint.. the democratic

voter file appeal made a great deal ofsense" the only unanswered

question \\'as.. who would pay the initial development debt?

14

15

One account was closed in March. 1991 and had httle activit)

Accordmg to documents proVided b~ GSI. the debt was $65.633.23

~~II'.""

Page 28, ~roved 11/7/96
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27

Recognizing, none ofour clients had the resources to payoffthe

development debt upfron~ we decided our firm would finance the initial

debt and pay ourselves back from the profaLS offuture rounds.nl6

The contract outlined hOYl Committee debt to GSI was to be

resolved. Should debt remain outstanding and the contract expire or be terminated, OSI

retained the right to solicit funds in the name ofthe Con,mittee until the debt including the

costs to GSI ofrecovering the debt was satisfied.

.., Apparent Prohibited Contributions

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

that it is unla\\ful for any corporation to make a contribution or expenditure in connection

with any election to federal office and that it is unlawful for any political committee

kno\\1ngly to accept or receive any contribution prohibited by this section.

Section 441b(b)(2) ofTitle 2 ofthe United States Code states.. in

part. that the tenn "'contribution or expenditure"" shall include any direct or indirect

payment. distribution.. loan" advance.. deposit.. or gift of money.. or any services.. or anything

of value to any political party in connection with any election to any ofthe offices referred

to in this section.

Section 116.3(b) ofTitle 11 ofthe Code of Federal Regulations

states, in part.. that a corporation in its capacity as a commercial vendor may extend credit

to a political comminee or another person on behalfof a political committee provided that

the credit is extended in the ordinary course ofthe corporation's business and the tenns are

substantially similar to extensions of credit to nonpolitical debtors that are ofsimilar risk

and size of obligation.

Section 116.3(c) ofTitle 11 of the Code of Federal Regulations

states~ in part_ that in detennining whether credit \\'as extended in the ("!~inary course of

business_ the Commission \\ill consider whether the commercial vendor followed its

established procedures and its past practice in approving the extension of credit; whether

the commercial vendor received prompt payment in full if it previously extended credit to

the same political comnuttee; and whether the extensIon of credit confonned to the usual

and nonnal practice in the commercial vendor's trade or indus~'

16 In AdVISOry Opmlon 1991-18 req,...ested by the ~e~ York State Democratic Committee which was

about to engage GSI to pro\'lde telemarketing sef"lces. the CommiSSion concluded that for any

prospectmg to be performed b~ GSJ on behalf of the requester. GSI would have to be reimbursed in

an amount equal their normal expenses and expected profit pnor to begmnmg the prospecting

program In order that GSJ not make a corporate contnbutlon

~UIII.t'"

Pace tccroved 1 .' 7 i 9£
o

'-0

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_.

21

Section 116.8(8) oftile Title 11 ofthe Code ofFederal Regulations

states, in part, that a creditor may forgive the outstanding "alance ofa debt owed by an

ongoing committee ifthe creditor and the ongoing committee have satisfied the

requirements of 11 CFR 116.3 regarding extensions of credit by commercial vendors, the

debt has been outstanding for at least twenty-four months and the following conditions

have been met. The creditor has exercised reasonable diligence in attempting to locate the

ongoing committee and has been unable to do so~ or the ongoing committee does not have

sufficient cash on hand to pay the creditor and has receipts ofless than $1000 during the

previous twenty-four months and has disbursements ofless than 51000 during the previous

twenty-four months and owes debts to other creditors ofsuch magnitude that the creditor

could reasonably conclude that the ongoing committee will not pay this particular debt.

As stated in the background section. the NC3 program created a debt

of approximately 564.000 during the audit period. In 1991.. receipts of$6~79 were

deposited into the NC3 account and disbursements of56.013 were made. GSI billed the

Committee 511.025 and deducted $5..350 from the account by check or telephone transfer.

resulting in a debt of $5..675 as of 12131/91. During 1992. receipts ofSl07,457 were

deposited into the account and disbursements of5107.496 were made. GSI billed the

Comminee $165.704 and deducted $107.400 by either check or telephone transfer,

resulting in additional debt of 558.304 by 12131/92. 17 It appears the extension of credit by

GSl approximately 564,000 at 12131/92. resulted in a prohibited corporate contribution

having been made by GSI and accepted by the Committee.

In the interim audit report. the Audit staffrecommended the

Committee obtain from GSI and provide to the Audit staff additional documentation or any

other comments to demonstrate that maintaining the outstanding debt was in the normal

course ofGSI's business. The infonnation provided should include examples ofother

customers or clients ofsimilar size and risk for which similar services have been provided

and similar billing arrangements have been used. Also. infonnation concerning GSI's

billing policies for similar clients and "·ork. advance payment policies. debt collection

policies.. and billing cycles should be included. Finally. provide infonnation detailing the

liquidation ofthe debt.

The Comminee's response to the interim report did not include any

documentation or comments from GSI that demonstrated that maintaining outstanding debt

was in the nonnal course of GSI's bUSiness. No infonnation regarding GSI's billing

policies for similar clients and "'·ork. advance payment policies. debt collection policies, or

billing cycles. ""as provided.

17 The Committee has apparentl~ se\ered Its relationship With GSI after the audit period The Audit

staff has no mfonnatlon to detemHne hether the debt was eventually extinguIshed.

__ III.I'"

Page 3C, Ap?~oved 11/7/96
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Rather, in response to the interim audit the Committee stated

that, "The Commission in its Audit Report has assumed that there bas been an advance of

value by OSI to the Party. The Commission has made this assumption based upon the

statements furnished by GSI. However. there was a legitimate dispute between the parties

as to whether any amount was owed to OSI by the Party, and this issue led the Party to

termiDate the relationship between the pany and OSI. Accordingly. the Party contends that

it did not receive any contribution. loan. or advance of value from OSI. The Party was

never able to obtain from GSI an explanation or accounting with respect to amounts

claimed by OS}. The unsubstantiated claims that amounts are owed is not a sufficient basis

for an assumption that a corporate contribution has been made."

The response also stated that:

•... counsel for the Democratic Party, by letter dated February 2, 1994~

alleged that OSI had breached the tenns ofthe contract between the

parties by soliciting on behalf of other clients, individuals who were

proven donors ofthe Party. whose names and addresses were included in

the NCD file. Counsel for the Democratic Party demanded immediate

return ofthe NCD file, and sought to tenninate the contract. The letter

funher made demand that GSI make no further solicitations on bebalfof

the party and demanded an accounting with ~tto all costs and fees

claimed by OSI."

A copy ofthe letter was provided.

In a second lener dated March 10, 1994, COWlSel for the Committee

stated in response to GSl's claim that the Committee owed them approximately $49,000

that they could not advise the Comminee to pay their claim. " ...The costs previously billed

to the Party were both excessive and unsubstantiated... [Y]our unauthorized solicitation of

the individuals on the party permanent file (N.C.D.) has damaged the Pany. Therefore~ the

pany is ofthe opinion that there is no outstanding obligation to GSI."

The Comminee's argument that there was a legitimate dispute

between the panies as to whether any amount was owed to GSI and. thus, did not receive

any contribution from GSI is not persuasive. The Committee did not provide any

documentation that demonstrates the costs billed to the Comminee were both excessive

and unsubstantiated. The documentation made available demonstrates that OS} decided to

finance the initial debt and pay themselves back the profits from future solicitation rounds.

Therefore. the extension of credit of approximately 564.000 appears to constitute a

prohibited corporate contribution.

~UIII'I'"

Page 31, Approved 11/7/96
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3. Disclosure ofPcbts

Section 104.3(d) ofTitle 11 ofthe Code ofFederal Regulations

states, in that each report filed under 11 CFR 104.1 shall, on Schedule 0, disclose the

amount and nature of outstanding debts owed by the reporting committee.

Section 104.11 ofTitle 11 ofthe Code ofFederal Regulations states.

in that debts owed by a political committee which remain outstanding shall be

continuously reported until extinguished. These debts shall be reported on separate

schedules together \\ith a statement explaining the circumstances and conditions under

which each debt was incurred or extinguished.

During the audit period, the Committee did not report its debt to OSI

on Schedule 0 (Debts and Obligations, Excluding Loans) as required. During 1991 the

Committee filed semiannual reports; \\trile during 1992 in addition to quarterly reports, the

Committee filed Pre and Post General reports. The correct balance for each reporting

period was:

fai.Qd Incnned Payment Qutstandin~

Year end 1991

7/1/91 - 12/31/91 $1 L025 $ 5.350 S 5,675

First Quaner 1992

1/1/92 - 3/31/92 716 1.650 4.741

Second Quarter 1992

4/1/92 - 6/30/92 71..747 38.100 38.388

Third Quarter 1992

7/1/92 - 9/30/92 71.038 38..350 71.076

Pre General 1992

10/1/92 - 10'14/92 20.786 10.200 81.662

Post General 1992

10/15/92 - 11/23/92 1.417 18.850 64.229

Year End 1992

11/24/91 - 12/3 1/92 00 :!50 63.979

~~III.I"

Paae
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ID the interim audit report, the Audit staffrecommended the

Committee file amended Summary Pages and amended Schedules D which accurately

reflect its debt to OSI for each ofthe reporting periods.

In response to the interim audit repo~ the Committee contends that

any obligation owed to OSI is a disputed debt pursuant to 11 CFR §116.10. Nonetheless,

the Committee filed amended Schedules D that materially disclosed the amounts owed to

OSI and indicated on eacb Schedule D that the amounts are in dispute.

~MII"""

Page 33, Approved 11/7/96
RECEIVED

FEDERAL ELECTION

COM",tSSIOM

I.l'JIT D,V~S!O!l

FEDERAL ELECTION COMMISSION

WASHINGTO"-. 0 C. 2~&3

Ser 26 2 22 rH '96

c

MEMORANDUM

TO:

THROUGH:

FROM:

BY:

Robert J. Costa

Assistant StaffDirector

Audit Divisi

~!: f

John C. S .. t

Staffu....ettatJ

Lawrence Noble

Genera1C~1

=:~Ji1G ; ,-"' .

Rhonda J. V osctingb ..:..-1"

Assistant General Counsel

., .

Andre G. PiDedal}J,~'~~..J-i Attorney •.

Septeacer 26, 1996

c SUBJECT: Proposed Final Audit Report on the North Carolina Democratic

Victory Fund (LRA #473)

,.....

........ 1. INTRODUCTIOf'

The Office of General Counsel has reviewed the proposed Final Audit Repon on

the North Carolina Democratic Victory FWld ("the Committee") submitted to this Office

on August 6, 1996. J We concur with fmdings in the proposed repon which are not

discussed separately in the fohowing memorandum. If you have any questions

concerning our comments, please contact Andre G. PinedL the attom~' assigned to this

audit.

Because the proposed Fmal Audit Report docs not InClude any maaers exempt from pubhc

disclosure under II C.F.R § 2.4. we recommend that the CommISSion's disc.usslon ofmls document be

conducted an open session

... ESTERO'" TOO~' A~O TOMORROV\

DEDIC "T[() T<) ",UP1'C THE PuBLIC ,,,fOI(M[U

Paae 35. Aooroved 11/7/96
Maacw....10 RabatJ. COIla

FiDa! Audit Repon

North CIroIiDa Democratic Victory Fund (LRA #473) "2

D. DISBURSEMENTS TO VOLUNTEERS USING MONEY ORDERS (II.C.)

The Audit staffidentified 3.033 money orders that were purchased by the

Committee on October 30. 1992 and November 2. 1992. The total value ofthese money

orders. denominated in amounts of515. 520.. 535 and 555" \\'85 581.155. Blank money

orders were forwarded to individuals responsible for paying volunteers C'coordinators")

for services related to a Weekend and Election day door hanger program (,·program").

The Committee sent coordinators "Volunteer Reimbursement Request·· forms that were

used to record the name. address. social security number and amoWtt paid for those

volunteers who received money orders for their program work. Coordinators were

required to forward the "Vohmteer Reimbursement Request" fonns. carbon copies of

money orders. and unused money orders to Committee beadquaners the day following

the election. The Committee maintained 2.500 copies of money orders as well as

uVolunte~rReimbursement Request·· fonns~ 70 \U1used money orders totaling 52.830

~:ere returned to the Committee. The Comminee itemized the purchase ofthe money

~f) orders on its Schedule H-4" s. but it did not repon the named recipients ofthe money

orders. Based on this reviev.·" the Audit staff concludes that the Committee did not satisfy

the requirements of2 U.S.C. § 432(b)(1) and 11 C.F.R. §§ 102.10 and 104.lO(b)(4).

c

c

This Office concurs with the proposed report's conclusion that the Committee did

not satisfy 11 C.F.R. § 104.1O(b)(4). Spec~fical)y. the Committee reponed the name aod

address of the bank from which it purchased money orders rather than the name and

address of each person who received a money order from the Committee. Furthermore.

the COnuDJnee reponed the purpose and total amount ofmoney orders that it purchased

from the bank rather than the purpose and amount of each money order given to an

individual.:

This Office does not. however. concur with the proposed reporfs conclusion that

the Comnunee did not satisfy the reqwrements of2 LO.S.C. § 432(h)(1) and 11 C.F.R.

§ 10:!.1 O. Specifically.. the Office of General Counsel beheves that the Committee's

dIsbursement of money orders to volunteers In denominated amounts of S15. 520, S35,

and $55 in conjunction with its use ofU\·olunteer ReImbursement Request" fonns is akin

to petty cash disbursements documented b~ a \\71nenJoumal. See 11 C.F.R. § 102.11.

11 C.F.R § 104. JO(b)(4) requues pohucal comnllnees who pay allocable expenses m accordance

wIth 11 C F.R § 106.S~) or § 106.6(e) to repon each dlSbunement for a Jomt federal or non-federal

expense or acnvrt)' The purpose ofulls reponmg requt.rement IS to enable the CommISSion to track the

flow of non-federal funds mto federal accounts and to ensure that the use of non-federal funds IS stricti\'

hrrllted to payment for the non-federal share of allocable activIties Explanation and Justification for .

1J C.F R § l06.Sti), 55 Fed Reg 26.06S-6b (June 26. 1990) As a result. the Committee's reponmg

obhganon dIffers SIgnificantly from other pohtlcal committees that do not have Jomt federal and nonfederal expenses or actIVItieS Compar~ lIe F.R § 104.3(b)(3) (Committees must repon disbursements

over $200)

Pace
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Mewca....to Robert J. CosIa

Filial Audit Repon

North c.roliaa Democratic Victory Fund (LRA #473)

PqeJ

The Office ofGeneral Co~..sel recognizes that S81.'55 is a significant amoUDt of

money to be disbursed through a petty cash account. However. 2 U.S.C. § 432(hX2) and

11 C.F.R. § 102.10 do not contain any language indicating ho\\' much money a petty cash

account may contain. Furthermore, the statutory and regulatory history for these

provisions provide no guidance as to ho'" much money a petty cash account may contain

nor does it provide guidance as to the purpose for such accounts or why documentation is

needed for petty cash disbursements. Notwithstanding the lack ofsuch information.. the

plain language ofthese provisions suggest that Congress Vlas concerned abc.n the

tr8ccabilit)· and verification of committee disbursements Wlder S100. In light ofthis

apparent concern. the Office of General Counsel believes that the analytical focus of petty

cash transaetions should center upon the ability to trace and document petty cash

disbursements rather than focusing upon the total amount disbursed through a petty cash

account.

A political comminee may maintain a petty cash fund from which it may make

expenditures not in excess of 51 00 to any person per purchase or transaction. 11 C.F.R.

§ 1O~.11. Ifsuch a fund is maintained. a written journal of all disbursements must be

kept by the treasurer of the political committee. Jd Such ajoumal shall include the

name and address of every person to whom any disbursement is made. as well as the date,

amount. and purpose ofsuch disbursement. Jd The "Volunteer Reimbursement

Request'" fonns maintained by the Committee contain the name.. address. social security

number and amount ofdisbursement for each volunteer who received money for his or

her panicipation in the program. In additio~ copies ofthe money orders that the

Committee maintained state the name ofthe volunteer as well as the date and amount of

disbursement. Fin31iy. the instruction sheets fClr' the UVohmteer Reimbursement Request~

fonns specifically state that the money orders are i.O ·'be used to reimburse volunteers

who request reimbursement f~~' the \\'t:'ekend and Election Day door hanger program.••

Because the Committee maini~ r. ~(~ fht: ~'lformatJon required by 11 C.F.R. § 102.11. this

Office believes that the Cor.".r-'l no. -s records are substantially equivalent to a written

journal. Therefore" this C'f~-!r" h.:iieves that the Comminee complied with 2 U.S.C.

§ 432(h)( 1) and 11 C.F.R. ; ;, ·.:·.1! be~.]use the dIsbursements are documented and can

be traced. "This Office furt~.I':: t-:heves that based on th~ Committee's documentation. the

Commlttee"s disbu~("int"ll~' &ore dlst.ngulshable from cash disbursements by other

political comminee.s L'o'np~"'e FIna! Audit Repon for the Nevada State Democratic

Party (approved Apn:: ! 996) and FInal Audit Repon for Clinton for President

(approved December li. 199,~).3

Significant differences exlSl between thiS audit and other audits mvo...·Jng non-check transacuons

For example. the Fmal Audit Repon for the "'evada State Democratic Party (approved Apral:!. J9Q6)

concluded that although the Nevada Commtnee made many mone~ order disbursements 0($100 to

mdlvlduals. often to the same U1dlvlduats on the same da). for voter registration efions. It mamtamed few

records to document Its dLSbursements Therefore. the disbursements fTom the Nevada CommIttee's petty

cash account were not documented and could not be traced In contrast, the Nonh Carolma DemocratiC

? a:1e _' . A~DroveC 11,' 7 / 9t

\

I

i
c

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M.....tID Robert J. COIla

FiDa) Audit Report

Nonb Carolina Democratic Victory Fund (LRA *473)

.... 4

m. TRANSA010NS WITH GORDON AND SCHWENKMEYER, INC. (11.1.)

Gordon and Scbwenkmeyer, Inc. r~GSI} is a telemarketing finn that operated

three federal telemarketing programs for the Committee known as NCO, NC2 and NC3.

OSJ deposited contributions received from these programs into corresponding custodial

accounts. Although GSI did not use profits from o~ program to pay the operational

shortfalls ofanotber, it transferred custodial account monies to its corporate account and,

on occasion., transferred corporate monies to its custodial accounts. GSl operated NC3 on

a prospective basis, thereby creating a $64,000 debt that the Committee owed to OSI

during the audit period.

This Office concurs with the proposed repon' 5 conclusion that GSrs operation of

NC3 resulted in an apparent S64,OOO prohibited corporate contribution to the C(Jmminee.

In addition. this Office notes that GSI's transfer ofmonies from its corporate accOWlts to

the Comminee's custodial acCO\U1ts may also result in apparent corporate conaibutioDS to

the Comminee that are distinct from the apparent $64.000 prohibited contribution that

results from GSI's extension of credit to the Committee. Compare 2 U.S.C.

§441 b{a)(corporation prohibited from making contributions in connection with any

ejection to federal office) with 11 C.F.R. § 116.3(b) (incorporated vendor may extend

credit to political committee so long as credit is exteDded in the ordinary course oftbe

vendor"s business; failure to do so results in prohibited corporate contribution).

Specifically, GSI may not commingle corporate l1lOIDes with comributioDS received

through the NC3 program. A deposit offunds into a Committee account is a contribution

to the Committee. 2 U.S.C. § 431(8)(A)(i). NC3 comributiODS are Committee Monies

that must be deposited in 8 designated campaign depository. 2 U.S.C. § 432(bXl). The

~C3 custodial account appears to be a Committee account and. as suc~ may not comain

corporate monies. See 2 U.S.C. § 432(h)(1 )(8) and Advisory Opinion (UAO") 1991-18;

see also. AD 1980-42 (fundraising agent acts on behalf of committee). Therefore, this

Office recommends that the proposed report include additional language noting that

GSrs transfers of corporate funds into the custodial accounts may have also resulted in

prohibited corporate contributions to the Committee.

VictOry Fund dIsbursed different denommated money orden on different days and mamtamed ldentifymg

mformauon for each dISbursement

TIns audit 1$ also dIStInguIShable from the Fmal Audit Report for Clanton for President (approved

December 1i. 1994). whIch concluded that per diem expenses paid by traveler's checks were the

eqUivalent of cash dlSbursements In vIOlation of II C.F.R § 10110 The Clanton Committee mamtained a

log that named the recq:)JeDt ofthe check.s. the days and location traveled. as well as the denonunatlon of

the traveler's checks. the total amount disbursed and the dales ISSUed The audit suff detemuned. however.

that the Chnton Comnuttee's log lacked Identlfymg information for the blocks of checks It lSSued In

amounts greater than needed for per damn in contrast. the Committee dISbursed money orders for the

Weekend and Election day door hanger program and maantaJlled more detailed Identlfymg records for Its

dISbursements

Pace 3E, AnoroveC 11/7/96
FEDERAL ELECTION COMf\"ISSION

WASHINCTO~. o.C 2o.ab)

AR#93-S0

':0

o

c

November 25, 1996

Mr. Lynda Tippett, Treasurer

North Carolina Democratic Victory Fund

P.O. Box 12196

Raleigh, NC 27605

Dear Mr. Tippett:

Attached please find the Final Audit Report on the North Carolina Democratic

\'ictory Fund. The Commission approved the report on November 7, 1996.

The Commission approved final audit report will be placed on the public record

on December 3. 1996. Should you have any questions regarding the public release ofthe

report. please contact the Commission·s Press Office at (202) 219-4155. Any questions

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

directed to \Vanda Thomas ofthe Audit Division at (202) 219-3720 or toll free at (800)

42.J-9530.

Sincerely,

-f~t1~ Roben J. Costa

Assistant Staff Director

Audit Division

Attachment as st:lted

• , ., J • • •• ( f I"· , •, .. "" f ...

\:",' f ,\. 111,1\\ \":ITI,\")~"(l\\

:); )' \,: III 1!,.!!l'l'l.ll1 t'l 1'.:: ''''I l~\~!'

Page 39, Approved 11/7/96
CHRONOLOGY

NORTH CAROLINA DEMOCRATIC

VICTORY FUND

Audit Fieldwork 6/13/94 - 813/94

c

:n

Interim Audit Report to

the Committee

Response Received to the"

Interim Audit Report

Final Audit Report Approved

8/11/95

11/6/95

Ilnl96

Page 41, Approved 11/7/96