FEDERAL ELECTION COMMISSION

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February 19t 1998

MEMORANDUM

TO: RON M. HARRIS

PRESS OFFICER

PRESS OFFICE

FROM: ROBERT J. COSTA

ASSISTANT STAFF DIREC

AUDIT DIVISION

SUBJECT: PUBLIC ISSUANCE OF THE REPORT OF THE AUDIT DIVISION ON

THE DEMOCRATIC PARTY OF ILLINOIS

Anached please find a cop>' ofthe final audit report and related documents on the

Democratic Pan)" ofIllinois. which \\"85 appro\'ed by the Commission on February 6. 1998.

Infonnational copies ofthe repon ha\'e been reeeh'ed by all panies involved and

the repon may be released to the public.

Attachment as stated

cc: Office ofGeneral Counsel

Office of Public Disclosure

Reports Analysis Di,'ision

FEe Library
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REPORT OF THE AUDIT DIVISION

ON THE

DEMOCRATIC PARTY

OF

ILLINOIS

App....ed Feb...." 6, 1998

FEDERAL ELECI10N COMMISSION

'"E STREET,N.W.

WASHINGTON, D.C.
TABLE OF CONTENTS

DEMOCRATIC PARTY OF ILLINOIS

Page

• Executive Summary

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07 FiDII Audit Report

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•02 B8ckpaund

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C; LepI Analysis 23 7b

TrlllSlDittal to Committee 27

ChronoIoIY 29
FEDERAL ELECTION COMMISSION

\\'~~HINCto, 0 { 2004&1

FINAL AUDIT REPORT

ON THE

DEMOCRATIC PARTY OF ILLINOIS

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The Democratic Party ofIllinois (the Committee) registered with the Federal

Election Commission on May 4, 1983 and maintains its headquarters in Chicago, Illinois.

The audit was conducted pursuant to 2 U.S.C. Section 438(b), which states that the

Commission may conduct audits ofany political committee whose reports fail to meet the

threshold level ofcompliance 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 repone The Committee's responses to those

findings are included in this fmal audit report.

ApPARENT PROHIBITED CONDIBl1TIONS AND Rt;roanNG Of DEBTS - 2

U.S.C. §§441b(a) and (b)(2), II CFR §§116.3(b) and (c). and 104.3(d) and 104.11. The

Committee received an apparent prohibited corporate contribution from Oordon and

Schwenkmeyer, Inc. (OSI). The contribution resulted from OSl's extension ofcredit

which for the audit period totaled approximately $67,600. In addition, the Committee did

not report any debt owed to OSI on Schedule D. In response to the interim audit report,

the Committee filed amended Schedules Dthat materially disclosed the amounts owed to

OSI. Also, the Committee contended that no impennissible conbibution resulted in its

anangement with OSI.

MIS$IATEMENT Of "NANDAI Acnyrry - 2 U.S.C. §§434(bXI), (2) and (4).

Reponed totals for receipts. disbursements and cash on hand for calendar years 1993 and

1994 were misstated. In response to the interim audit report. the Committee filed

amendments which materially corrected the misstatements noted.

RECOBQKEEnNC roB CoNTRIBtmONS fROM INDIYlDIJAI 5 2 U.S.C.

§§432(c)(3) and (i). and II CFR §104.7(b). The Committee did not obtain and/or

maintain documentation relative to the occupation and name ofemployer for

approximately $71.000 in contributions received from individuals. The Committee

asserted that it did meet the best eITons provision; however, the audit report noted the

Committee did DOt provide documentation to demonstrate that it met the best effort

requimnents.

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DISIUISIMINTSm YOY!NDEISUSING CuRRENCY- 2 U.S.C. §432(h) aDd

11 CPR §I02.11. The Commiuee disbursed $11.000 in cuneacy to certain iDdividuals

for election day expeases orthis mIOUDt. S6.93S represented disbursements in excess of

tile $100 pertnDsac:tioa curreracy IimiL The Committee responded by indicating that a

petty cash fUnd is DO loaaer used.1Dd that employees me DOW reimbursed by check.

DoQIMENTADONOf "'IINDON RADos-II CPR §§I04.1O(b)(2) and

104.14(b). Numerous allocation ratios disclosed by the Committee related to the Federal

and IlOD-Federai portion ofpropams orICtivities were not properly documented. The

Committee provided &IdditioaaI cIocumentation which reduced the Dumber of

undocumented aUocatioD ratios to 12. Forthese. the Commiuee maintained that most of

the activities were non-Federal in IIItUre. but defiayed with Federal ftmds.

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FEDERAL ELECTIO" CO"'1~1ISSIO~

REPORTOF THE AUDITDIVISION

ON THE

DEMOCRATIC PARTYOFILLINOIS

BACKGROUND *

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A. AUDIT AUTHORlT\·

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This repon is based on an audit ofthe Democratic Part)· ofIllinois (the

Comminee) undenakm b)· the Audit Di,·ision ofthe Federal Election Commission in

accordance "ith the provisions ofthe Federal Election Campaign Act of 1971. as

amended (the Act). The audit ""85 conducted pursuant to Section 438(b) ofTitle 2 ofthe

United States Code .1lich Slates. in pan. that 1M Commission rna)' conduct audits and

field investigations ofan)' political comminec required to file a repon under Section 434

orthis title. Prior to conducting an)' audit under this subsection. the Commission shall

perform an internal fC,'ie,,' ofthe rcpons filed b)' selected comminc:es to determine ifthe

repons filed b)· a panicular comminee mc:ct the threshold requirements for substantial

compliance "ith the Act.

B. AlfDIT CO\'EItAGE

The audit covered the period from JanlW)· I. 1993 through December 31.

1994. The Comminee reponed a beaiMins cash balance ofS104.880; total receipts for

the period ofS967.643: total disbursements for the period ofSI.045.489; and an ending I cash balance ofS27.033.

c. CAMPAIGN ORCANIZATIO'

The Committee registered "ilb the Federal Election Commission. on

May 4. 1983. as the Democratic State Central Comminee ofIllinois. On July 2. 1990. the

Comminee filed an amended Swement ofOrJanization and changed its name to the

Democratic Pany ofIllinois. The Commlnce maintains its headquaners in Chicago.

The Aucbll1.1fTroundcd aU fi,utn 1ft dus rcpon 101M nearest dollM. 1Mrc "'·as a material

missulaemcnl orrlUftClal actlVII) .. 199) and IteM (1ft Fandlftlll.B.).

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Illinois. The Committee used three bInt 8CCOUnIS for ill fcdaaI Ind five

custodial bank 8CCOUDtS maintained by • fimdraisi..fum in California

c. KEY PERsoNNEL --.

The Trasumofthe Committee cIurina the audit period was Mr. Stewan

Winstein. The current Treasureris Mr. John Gianulis.

D. AUDITSCoPE AND PROCEDVRES

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The audit covaed Ihe following pmeraJ eatesories:

The receipt ofCOIIIributions or loans in excess ofthe SlatUlory limitations:

the receipt ofCOIIIributions from prohibited sources. such as those from

corporations or labor orpnizations(sec Findingll.A.);

proper disclOSlft ofCOIIIributions·from individuals. political comminees

Met other cnaities. 10 include die itemization ofcontributions ,,'hen

raauin:cL • -~II ..the completeness and 8CCUnICy ofthe information

disclosed:

proper disclOSlft ofdisbuncmcnas including the itemization of

disbuncmcnas --hen rcqui~. as "-ell as. the completeness and accuracy of

the infonn:ation disclosed;

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s. revin,. ofexpenditures made on behalfoffederal candidates;

6. proper disclosure ofeampai,n debts and obligations (see Finding ItA.);

7. 8CCUnIC). oftotal ~cd receipts. disburscmmlS and cash balances as

com"" 10 camp;Up bank records (sec Findina; II.B.);

8. adequate recordkccpinS for campallft transactions (see Finding II.C.);

9. proper disclosure ofthe allocation ofcosts associated with administrative

expenses and Kb';tics conducted joinll)· on behalfoffederal and nonfederal elections Mel candidates: and.

10. other audit procedures thiu "'en: deena 1ICCCSSiU)- in the situation (see Find..11.0. a E.).

. In Advaary 0,... '"'-.1. the COIIIfftess..cone a CUSIOd aecount(s) sea up by

litis fundnIiuDa r...lCIIftI_ - a,an r. a c.II8I -1CCOWIt or Commence.

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During our testing ofcontributions solicited and deposited by a

fundraising firm. aD agent ofthe Committee. the Audit staffnoted that the documentation

made available consisted ofbank statements and computer-generated schedules ofthe

contributions (see Finding II.A.). As such. the Audit staffwas.unable to verify the

accuracy ofthe contributor information contained on the computerschedules because no

third pany documentation existed (i.e.• copies ofcontributor checks anellor contributor

response cards).

During our testing oftbe Comminee·s disbursements. the Audit staff

noted several instances where the only available documentation was a canceled check

(without a notation as to purpose). In these instances. the documentation did not contain

support for the addresses aneIIor purposes disclosed on the Committee·s repons: thus. the

Audit staff ""as unable to veri!)' the acCUI"8C)' ofsuch infonnation.

The Audit staffdetennined that the available documentation satisfied the

minimum recordkeepina requirements of II CFR §102.9. However. in man)' instances

the results ofour tests ,,-ere dependent on the accuracy ofthe documentation generated by

the Comminee.

The Committee did not make a\'ailable any documentation that supponed

its calculation ofratios used to calculate the federal and non-federal portions of

disbursements made for allocable fundraisina aeti\it)'. As a result. the Audit staff\\'as

unable to \'erif)' the acCUIX)' ofthe ratios used to allocate the fundraising expenses for

each e\'cnt. (Sec Findinall.D.).

Unless specifically discussed beI0\\'. no material non-com~liance was

detected. The Commission rna)' pursue funher an)' ofthe matters discussed in this report

in an enforcement action,

II. AUDIT FINDINGS AND RECO"tMENDATIQNS

A. TRANSAcrIO~S\Y'TII CORDOS ASD SCII\\'EN~"'E"ERt INC.

Gordon and Sch"-enkme~'er. Inc. (OSI)is a fundraising and

telemarketing finn located in EI Segundo. California. Its 1\\'0 principals are Mr. Michael

Gordon and Ms. Kris Schwenkmeyer. Both indi\Oiduals are fonner employees ofthe

Democratic State Central Comminee ofCaJifomia.J They founded and incorporated OSI

in 1985.

.. Sft R~orthe Audll DIVISIOn on the Democrallc Swr Cmllli Commlnrc orCalifornia.

Fmdinc ItA. The CommiSSIOn approved Ihr rcpon on Aucusl29. 1996.

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The Committee entered into a contract with OSI for the purpose of

raising funds through a telephone solicitation program(S).4 The contract specified that

OSI would act as an agent on behalfofthe Comminee and soli,:it contributions from

contributors contained on lists provided by the Committee. The Comminee pro\-ided 1\\-0

different types ofconaibutor lists: a list or"prior" contributors. and. a list of ··potentiar·

contributors. OSI billed the Comminee using t,,-o separate fee structures: one for

telemarketing progJ1U1!s targeted at "pro\-eJ1" donors and another for programs targeted at

•'prospective '"donors.5

The contract also specified that as) ,,-ould open a custodial

checking account(s) into \\ilich 051 \\'ould deposit all ofthe donations receh'ed through

each ofthe telephone solicitation prosrams. During the audit period, 051 maintained five

custodial bank accounts' for the contributions recci\-cd from fi\'c different federal

telemarketing programs. OSI identified the programs as: lOP. ID2. ID3. 104 and BU2.

The Audit st:ltTnotes that lOP and 102 \\"ere the names ofthe ·'prospecting·· proJ:;ran1s.

GSI deposited contributions received throu~h the respecti\'e prosrams into different

accounts accordinG to \\"hich prosrarn lencrated the donation.

The Audit staffdetermined that OSI uansferred monies from the

custodial accounts into its corporate account.' In most instances. the transfers occurred

shonl~' after GSI deposited contributions into the custodial accounts. Apparently. OSI

monitored the cash balances in the custodial accounts and transferred monies from its

corporate account back 10 t~ custodial account before- CiS) made periodic payments to

the Commill« rqncscnting the net proc~ds ofthe prosrams. The contract provided that

GSI "'ould Prcp3I'e and pro'.ide a financial StJlemcnt to the Committee every thiny d3)'s; .

hn\\'C\'Cf. the contract did not specif>' dales on ,,"hich OSI ,,-auld make payments to the

Committee.

GSI used the prosrcclinS programs (lOP and 102) to expand the

Committ",-e·s contributor base. The inllial cost ofthc:sc prospecting programs exceeded

the proc«ds d~ to the: hil;h ,'olume of calls made: and the 10\\' number and amount of

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The effective covcrqc cilia of 1M connct -ac from April I_ 1991 throup Jul)' I. 1992. The

Comm.nce dad DOl provide III~ documentat..dw dcLl.1cd subsequmt extensions or other

rnisaons to the on...1cOlIna

"ProspeC1m,· Cas ~fcmd 101ft II\I\~' -as 1M process b~ which the fundraiser (CiSI)

annnplCd 10 expand 1hc conD1bulor baw for IU clenl Uk Commmcc)

(iSI ckM.cd one ofthe banL accounl\ an ~t.J) 1993 -as.J minimal amount of aCII\',I)" in the

account

The contracl dad ftOC sptClf) Itw CiSI "ould 1Rft\1n- funds 'rom Ik custodial accounts 100SS'S

CorporalC account for an) leason

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contributions received. Apparently, OSI would eliminate individuals from the

prospectina 1ist who did not contribute and the remaining conuibutors would be added to

the proven donors list. Funher. the prospectina programs resulted in debts beina incurred

by OSI, on behalfofthe Committee. because 1he expenses ofthe program consistently

exceeded the revenue and the contract did not contain any provisions for up front funding

(8 deposit or adwnce payment by the Committee).'

The contract also specified ho\\' the Committee and aSI ,,'ould

resolve any outstanding debts (owed b)' the Comminee to OSI)should the contract expire

or be terminated. It stated. in pan.

.....if, al the time of lennination of this Agreement. OSI is still owed

money for services perfonned hereunder. OSI shall retain the right 10

continue to solicit donations on behalfo(COMMllTEE and OSI ma~'

retain mOM)'s obtained (rom such solicilations. until OSI is paid in full

.(or its senices rendered hereunder. Additionall)'. OSI ma~' add to the

amount due it from COMMllTEE an)' sums due it for the continued

solicitation pro\'ided for in this Section.....

An unsiped rider anached 10 the "Tinen agreement provided to

the Audit staffSlates. in pan.

·lbat the onl)· funds a\·ailablc 10 OSI as compensation per this

AOREE"IE~'T ,,"ill be those rccei,·cd as a direct result of its effons

pursuanl hereto and "lIich are deposited in the custodial account.

OS) expressl)· rccOlniza that COM~lllTEE has no liability for

pa)'mcftllO 051 "ilaUOC\'CI'."

For the period under m·icv.·. the Audit SlafTcompleted a

reconciliation ofthe bank aeti\il)· in the custodial accounts. We determined that the total

bqiMinl cash balance ofthe custodial accounts ,,-as S1J.II S. During the audit period.

OSI rcc:ei,'cd and deposited into the custodial accounts contributions lolaling S383.080,

In addition. OSI issued refunds ofpro,ram costs to the Committee totaling SI8.675.'

Disbursements from the custodaal accounts Includ~d S~90.~70. transferred from the

custodial account(s) to OSI·s corporate account. for pl'OIram opcratina costs; and. $430

for miscellaneous bank senice chaJles. Further. OS! fOI'""-arded "net proceeds" from the

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In Ach~' 0p1n1Oft '"1·1•. the Comm"'tm concluded thai for 05'10 beain prospectinl on

behalfoflhc Nnt VOlt 5aatc Danocrallc Commlllft (NYSDC). NY5DC would haw 10 make a

pa)...... to CiSI 10 Gsl .....Ift, the prospect., JIfOIfM'............. equal 10 CiSI's

normal npeMft npcacd profll 'ft ....SIO. NYSDC -auld avoid reccivlftl. prohibited

ContributIOn from (iSI

Accorcbn,10 Cisi. ahac refund, arc ofT"" 10 opmatmc c_penddUfft. n.c reasons for the offsets

arc unknowft.

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prosrams to the Committee totaling S121.100; 571.500 designated for its federal account

and SSO.JOO designated for its non-federalaccount The schedules provided by OSI did

not indicate the reasons for designating cenain contributionsto the non-federal account.

As a result ofthe above uansactions. the total ending cash balance ofthe custodial

accounts at December 31. 1994. was 52.929.

The Audit staffalso detmnined that the Committee o\\·ed a net

outstanding debt to OSI on January 1. 1993. totaling 533.431. The outstanding debt

balance at December 31. 1994, \\'as 5239.

Except for a ponion (S63.5oo) ofthe "net proceeds" received, the

Committee did not disclose on its FEe rcpons. the majority ofits ttansaetions \\ith OSI.

(See Finding II.B.).

2. Amwml Prphjhi'cd ContributiON fmm OSI

Section 441b(a) orTitle 2 ofthe United States Code states. in pan.

Wt it is unla\\ful (or an)· corporation to make a contribution or expenditure in cOMection

"llh all)' election to any political office and that it is unla\\ful for all)· political committee

kno\\inal)· to accept or recch-e an)' contribution prohibited b)' this section.

Seetion 441b(b)(2) ofTitle 2 orthe United Slates Code states. in

pan. that the lerm ··contribution or expenditUft.. shall include any direct or indirect

pa)~ent. distribution. loan. acl\·ance. deposit. or lift ofmone)'. or an)· services. or

iln)1hin,; of ,·al~ to an)' political pan)- in connection "ith an~' election to any ofthe

offices rcfencd to in this section.

Section 116.3(b) and (c) ofTitle II ofthe Code orFederal

Regulations Slates. in pan. that a corporation in its capacit), as a commercial vendor may

extend credit to a political commincc or another person on behalfofa political committee

pro,·ided that &he credit is extended in the ordilW)' course ofthe corporation's busineSs

and the terms are substantiall)- similar to extensions ofcredit to nonpolitical debtors that

are ofsimilar risk and size ofobliption_ In detmnining ,,'hether credit was extended in

the ordi~' course of business. the Commission ,,-ill consider ,,-bether the commercial

,·endor foJlo\\-ect its established proccduln and its past practice in approving the

extension ofcredit: ,,1Icther the commcn:ial \'cndor rccei,·ed prompt payment in full ifit

pre,·iousl)' extended credit to the SiUM political committee; and ,,-hether the extension of

credit conformed to the usual and normal practice in the commercial vendor's trade or

industry,

L Extension o(Credit on ProspectinG Accounts

Th~ tL-nnS ufthe: asrcem~nt be.,,-ec:n the: Committee and

aSI outlined the fees "iUch aSI "Quid rc:c~I\ e as compensation (or the services

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provided. Further, the agreement stipulated that the source ofthese fees was limited to

ftmds deposited in the custodial accounts(s) as a result ofOSrs solicitation efTons.

The manner in -itich OSI conducts fU'ndraising activities

resulted in the majority oftbe costs being incurred up front. Apparently. OSI paid these

costs from its own funds and obtained subsequent reimbursement as OSI recei\'ed

contributions. As a result. the Comminee would have an initial outstanding debt to GSI

which would be liquidated as OSI recei\'ed additional contributions. The Committee did

·not disclose on its FEe repons. any debt o-oed to or from OSI during the audit period.

The Audit staffrevie\\-ed copies ofthe billing invoices

provided by OS) for each solicitation program and the bank activity ofeach custodial

account from inception in 1991 through December 31. 1994. OSI billed the Comminee

5787.639 for the period April I. 1991 through December 31. 1992 and OSI transferred

5754.208 (total program costs less refunds ofprogram costs) to their corporate account as

payment. The net debt (for all solicitation pro(!ram5 in operation) o\\'ed to OS) on

December 31. 1992 \\-as S33.431. Billin~s from J3n~' I. 1993 through December 31 •

1994 totaled 5238.403 and net pa)111ents to OSI totaled S:!71.S9S. resulting in .. net debt

O\\'ed b)' the Comminee of5239.

\\'hen each solicitation program is examined separately. the

unreponed acti\it)' includes Comminec d~bt 0\\'Cd to OSI and net proceeds due (but not

yet paid) to the Comminee. OSI account~d for each program separatel)' and did not use

profits from one program to pa)' the opcr;lting shonfall ofanother program. At the

beginning ofthe audit period. the amount of unreponcd debt O\\'ed to OSI as a result of

the prospecting programs "'as 548.912 (lOP 537.588 ·102 511.324) and the unreponed .

net proceeds due to the Comminee as a result ofthe other programs totaled S15.481 (103

(SI3.S9O) + (BU~ (51.191». On Dcccm~ 31. 1994. the unreponed debt \\'as S24.31S

(102 SI.611 ... 104 S:!:!.7o.1). "'hilc UJlR.1klned MI proceeds had increased 10 S24.076

(lOP ($4.055) + 103 (519.4-86)· BC:! (SS75)). l'nliLc the prospecting prognuns· debt

position at Janual)' I. 1993 (S48.912 o"'cd 10 GSI). as ofDcccmber 31. 1994. OSI owed

the Committcc 52.444 «$4.0SS) + $1.611) in nel proceeds multing from the lOP and

ID2 programs. In the table beI0"'. positi\'c amounts R:pfC5cnt Committee debt o\\'cd to

OSI: ne~3ti\'e amounts represmt unrc-roncd 11(I1 proceeds due from OSI to the

Committee.

Program JantW) I. 19C)3 December 31. 1994

lOP S 37.518 ($ 4.055)

to:! 11.32-1 1.611

103 (13.590) (19.446)

104 .0- 22.704

BU:! «J RQ,) ( 4\7~)

S 33.431 $ 239

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Based on the above. 1ft apparent prohibited contribution

existed in the amount of148.912. the oU1StlDding debt or extension ofcredit by 051 for

the prospecting propams atJanUll)' I. 1993.

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b. Use o(Offseas (Refunds ofProgram Costs) from GSI to

Fund Activity in Custodial Accounts

As Pf'e\-iousl)· noted. OSI deposited the contributions

received (rom the various fundraisinl propams into the custodial account(s) and then

transferred the funds inlO ilS corporate account. GSI described the purpose ofthese

transfersIS "propam costs." OccasionalI)·•OS) transferred monies back into the

custodial accounl(S). aSI described the purpose ofthese uansfcrs as "refunds" of

proaram costs. The Comminee did not provide documentation from OSI "i1ich

demonstrated that the Committee ,,-as due these refunds. In addition. these ··refunds··

appeared to liquidate obliplions arising from Rveral ofthe custodial accounts. The

Comminee recei\'Cd refunds ofpropam cOS1S totaling $18.675 ($17.575 in 1993 and

SI.IOO in 1994.)'1 Absent a cIemonsualion to the contnu)·. it appears that an additional

apparent prohibited contribution resulted in the amount ofSI8.675.

3. Disc10stur ofDc'" ·OSI

Section 104.3(d) ofTitle II oCtile Code ofFederal Regulations

states. in pan. that each IqM)ft filed under II CFR 104.1 shall. on Schedule D. disclose

the amount and nature ofOU1StInding debts O"'ed b>. the reponing committee.

Section 104.11 ofTitle II ofthe Code ofFederal Regulations

states. in pan. thai debts O\\1:d b).• political committee "ilich remain outstanding shall be

continuousl)· reponed until cxtin1!uishcd. These debts shall be reponed on separate

Kheduln toa:c:thn' "lib a Slatemcnl explaining 1M circumstances and conditions under

which each d~bl ,,-as incurred or extin,uishcd.

Durins 1hc audit period the Comminee did not repon any debt to

OSI on Schedule D (Debts and Obli~alions. Excluding Loans) as mJuired. The

Comminee filed scmiiIMual repons for the' 199) calendar )·ear and quanerl)· repons.

along v.;th Pre-GcneraJ and Post General repon.s for the 1994 calendar year.

The Audit stlfTdctmnined the be~iMing and ending outstanding

debt balances. along \\ith the toIaI amount incurred and total amount paid for each

reponing period. asIUIIIIIIariad belen,,':

.. The Conunlllft clad ..daKlow thew rttf..Oft iii (Sec Fendlft& II.B.).

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Outstanding Outstanding

Balance at Amount Payment Balance at

Bqinning or Incunecl this Close of

Rcaoninr Pcriqd lmad !hi, Pcrjgd lmad lmad

Mid-Year 1993 (1/1193 .6130193) 141.912 66.591 '92.885 22.625

Year-End 1993 (7/1193 - 12131193) 22.625 36.527 48.726 10.426

1st Quancr 1994 (111194 - 3131194) 10.426 35.167 49.250 (2.957)

2nd Quarter 1994 (4/1194 • 6130.'94) (2.957) 60.520 S4.478 3.015

3rd Quarter 1994 (7/1194 - 9130194) 3.015 11.609 13.900 794

Pre-General 1994 (10/1194 - 10:19194) 794 26.727 11.30S 16.216

Post-General 1994 (10120194 - 11121.'94) 16.216 557 800 15.973

Year-End 199-& (1It.!9.194 - 12'31194) 15.973 0 2S3 15.720

The Audit staffdid not fully develop this finding prior to the exit

conference because the Committee had not pro,"ided complete documentation relative to

GSI and the custodial accounts. The Audit staffrequested additional documentation at

the exit conference. In response. the Comminee provided billing statements from OSJ.

financial statements that detailed the monthl)" acthoil}· for each program. and bank

statements for each ofthe custodial accounts.

In the interim audit repon. the Audit staffrecommended that the

Committee take the follo\\ing action:

a) pro,·ide documentation \\ilich demonstrates that- an apparent prohibited

contribution. totaling 567.587 ($-18.912 + S18.675), did not occur: and.

b) file amended Summar)· Pa~es and Detailed Summ3f'y Pages (FEe Fonn 3-

X. Pages 1and 2). alon~ \\ilh accompan)"ing Schedules D. for the 1993

and 1994 calendar )tears. to renect the unrcponed debts with Gordon and

Sch\\'enkmeyer. Inc. (sec also Recommendation #2); and.

c) provide documentation from Gordon and Sch\\ocnkmeyer.lnc. that details

any subsequent contrael(S). amendmentes). extension(s) or revision(s) to

its April I, 1991 agreement.

In its response to the interim audit repone the Committee did not

provide an~" additional documentation as requested in (a) and (c) abo\'e. Instead. the

Committee elected to submit commen~" from Ms. Barbara Gunman. the Assistant

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Treasurer ofthe Committee. as well as. a letter from Mr. Mike Gordon. president of

Gordon and Schwenkmeyer. Inc.

Ms. Guttman and Mr.Gordon both contend that GSI did not make

any such impennissible contribution to the Comminee. In regards to the apparent

extension ofcredit made b)' GSI to the Comminee ($48.912). Mr. Gordon explains.

··We do not belic\'c that it is appropriate for auditors to conclude that

an)' such balance • assumin,; Commission auditors accurately

calculated it • represented a contribution to the Part)· [the Committee].

No basis exists for auditors to isolale an account balance on one cia)' of

our nine )'ear relationship "ilb 1M Pan~' and then allege that such

amount represents a contribution 10 the Pan)'.

MMoreo\'er. \\'e ha\'e implemented procedures for our prospecting

accounts \\1lich preclude an~' such conclusion that an isolated

outstanding balance represents a contribution, More specificall)·. \\'C

currmtl)· operate prospectin~ accounts (or approxim3tel~' thin~' clients.

includina; thinem stale p3I1~' comminecs.

M\\'~ impose a consislent set of practices and procedures for collecting

amounts due from these accounts. In each instance. \\'e endea\'or to

I'rompll~' n:soh'e the outstlndin~ b:aJances (or the accounts. \\ithin

discn:le lime periods. as (undraisln~ prac~s acaue.

··Based on our thinccn )'ears of operation in political and ch3ritable

fundraising. "'C bclie\'e that our proc~1ftS for administering our

account relationship "ith t~ P3ft~. as "oell as our other clients.

conform tll the usual and n01'm31 prxllCC In thiS indust~o. We do not

treat. and !I3"e not treated lhe: P3J1~ an~ differentl)' from our other

clients.

-Our ~\'ie\\' of the Pan~o' s account re'oeals Wt "oe obtained payment

for the: costs of the lOP and ID~ accnunts I'ursu:mt to our es~blishcd

practices and procedurn0 ~ton: sJ"C'Clficall). during the: audit period.

1993·1994. ,,'C obtained p3~-mcnl for 5Cf'\'lces rendered "ith respect to

the lOP and 102 accounts ,,-jlbln such discrete time periods. In

sumtnar)·. in our experience. P3l1~- has pre\'iously maintained. and

continues 10 maintain. a S3t1S.acto~ account ~Iationship ,,'jth GSI.

-FiD3l1l. pursuanl to our aitrc:emmt "'jab the Pan)' 10 administer the:

IDP and ID~ accounts. "-ca ha\"C recourse ,,'jlh other Party assets to

CO\'~r uncollectible shon(all In thnc accounb 'I'

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Ms. Guttman also contends that.

"[f]or the reasons set fonh in GSrs lener... [quoted above] any such

fundraising operation did not represent a contribution because it \\-as

consistent with 11 C.F.R. §§116.3(b) I:. (c). In addition. ...such

fundraising operations ,,-ere also consistent with Commission

Advisory Opinion 1991-18."

Mr. Gordon assens that OSI has implemented procedures that

promptl)" resolve any oUtsWlding amounts o,,'ed to than from its clients. including the

Comminee. Ho\\-eveI'. neither GSI nor the Comminee provided an)' additional

documentation. (e.g.• an example ofan amended contract or conespondence bet\\'een OSI

and an)' ofits clients) that sU51ains such an assertion, Mr" Gordon states that OSI has

recourse \\ith other Comminee assets to co\"er an)' uncollectible shonfalls in the

prospecting accounts, Under this scenario. the apparent extension ofcredit made from

OSI to the Comminee \\-as 533.431. on JanWU)' 1. 1993 and subsequently reduced to

approximateI)' $7.000. b)· the close ofthe reponing period. June 30. 1993, During the

audit period the Committee·s contract contained no such clause, In addition. the Audit

staff notes that in prior ex~ricnces "ith OSI (sec Footnote 3). agreements ,,'jth other

political clients specificaJl)· staled thai OSI accounted (or each program separately and

did not use profits from one propam 10 1'3)' the operating shonfall of another proltranl,

I\bsent documentation to th~ contral)'. the Audit sUItT l113intains that the apparent

cxt~nsion of crcdil.tol3lina; S48.QI~ n:~ts:an al'~nt prohibited contribution,

In rcfermce to appamlt prohibited contributions. totaling 518.675.

··U~ ofOffsets (Refunds ofProgram Costs) (rom OSI 10 Fund ACli\'il)' inCustodial

Accounts··. ~ts. Guttman explains that 051. supponed b)' the statements from Mr,

Gordon.

·-treated the Pan)··s accounts n:ccl,·..hle in the same manner as those of

its other political and non-pollilcal chents, In this context. an)'

adjustment in the account n:lationship_ ,·i.. refund. 10 address mistaken

o\·er-chaJ'J;es b~· GSI. rnol\"e pood faith disputes o\'er amounts due. or

ensure th3t recei\'ables \\~ d~hitcd a,;:unst the Pan~·· 5 account at the

appropriate time do nol represent an impennissible contribution.··

Althou~h t.ts. Guttman and ~tr. Gordon assc:n that osrs trcatnlent

ofthe Comminee \\-as consistent \\ith het" OSI trc::lted ItS other clients in re~ards to

··Refunds of Pro1!r:Im Costs:- neilher Ih~ (·ommlttec: nor OSI pro\·idc:d :my additional

documentation \\ilich detailed the basl~ and'or the calcul:ation ofthe amounts refunded to

the Committee ($18.675), Absmt such ducumcDl3tion or some other demonstration to

the conll'3J)·. the Audit staffconsidc:rs the: refunds 10 be contributions. The assenion that

OSI consistentl)· applies th~ procedures tu other clu.'1lts IS DOt per5U3Si\'c in determining

,,'hcther or not GSI made a prohihlted cunlnhuuon to the Cummittee.

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As such. the Audit staffmaintainsthat the Committee received an

apparent prohibited contribution fiom GSl101aIini S67.587 (548.912 + 518.675).

In response to Findina: IIA.3•• Disclosure ofDebts. and the

recommendation at section (b) above. 1heCommiaee filed aaended Schedules Dthat

materially COIftCted the public record. The Audit staffnotes that Ibe amounts disclosed

on the .mended schedules reflect In amount 0\\. to as) that has been reduced b}' an~'

outstanclina proceeds due 10 the Committee.

B. M.SSTATEAI£~T Or FI~A~C1"LACTI'-m'

Sections 434(b)(I). (:!) and (4) ofTitle 2 ofthe United Slates Code Slate.

in rele,-ant pan. ahat each report shall disclose &he amount ofcash on hand at the

bqiMing ofeach reponina period. the total amount ofall receipts and the lotal amount

ofall disbursemenlS for the reponina period and the ca1endar year.

1be Audit stilTs reconcilialion ofthe Commincc·s reponed fin:ancial

acti\"it~'lo its bank 8Cti,"il)" IC\u1cd material missaatemenlS in the Committee·s reponed

financial aeti,"il)' for the 1993 and 1CJ94 calendar )·cars.

I. 1"' MimmC"'C"'$

The Commillcc reponed a bqilUlina cash balance at Januar)' J.

1Q93.ofSI04.880. The Audit stafTdclcrmincd thai the Committee undcntated its

hegiMinl cash balance b~' 538.425. This net understatement ""as due to the follo\\;na:

UJUqX)nc:d bclinnina cash balances offi\'c custodial xcounlS maintained.by OSltotaling,

513.11S(sec Finclina;II.A.); and. an unmol,"cct prior period misstalement(s) totaling

S:!S.310.11

The Commil1cc reponed lotal receipts ofS3S7.172 for tM 1993

calendar )'eaJ'. The Audit staffdc:tcnruncd thaI the: Commiltcc understated its receipts h)'

5154.378. This net understalcmcnl "'a.'\ pnmaril)' d~ 10 the follo\\"ing: unreponcd

receipts from GSllotalina: SI39.00S; and unrqtOnat refunds from OSI totaling SI7.S7S

(see Findina; II.A.). An unrcsoh'cd difTc:rmc~ exists in our reconciliation oftbe

Commince·5 reponed receipts totalin~ 5~~O~.

The Committcc reponed toW disbursements of$446.770 for the

1993 calendar year. The Audit stiffdetennincd that the Committee understated its

disbursements b). SI91.110. This rw:t understatClllCllt \\":IS primaril)· due to the follo\\ing:

unreported disburscmcnls from the custodaal accounts mainaainc:d by OS) totalina;

SI59.185 (see Finciincll.A.): unrcponcd disbursements from the accounts maintained b)'

II The Camm.... did..P"'W1dc dDcumcMaalOft .... detailed lIS calcu"" orbeaminl cash on

hind at.....,· I.•,,). 11Iu,- dw Audd lUll'••1IftaI* 10 dctcnnenelhc rason(S) for the

&aVeSOlvccI pan..ordw ..n••CIftCftI

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the Committee totaling S37.555: disbursements made from the Commine4fs non-federal

account reponed as beina made from its federal account lotaling SI0.759; unreponed

transfers from die custodial accounts to the Comminee·s non-federal account totaling

58.500; disbursements thai were reponed ",;ce totaling S1.270; and. other miscellaneous

reponing eITOrs that result in a net o\'el'Statement of51.401.

2. J994 Misstatemcots

The Comminee reponed lotal receipts of$610.471 for the 1994

calendar year. The Audit stafTdctennined that 1M Committee understated its receipts b~'

S187.261. This net understatement \\"35 primaril)· due to the follo",·ing: unreponed

receipts from 051 telemarketing programs totaling $ 181.133; and. unreponed refunds

from 051 totaling 51.100 (see FindinIII.A.); other unreponed receipts totaling $48.779;

an understatement in the reponed amounl of a transfer. dated No\'ember 4. 199-1. totaling

58.000; non-federal receipts reponed in error as federal m:eipts totaling S:!:!.568; receipts

that "'ere reponed.I\\ice. tOlaling $~8.13"; and. other miscellaneous reponing errors that

result in a net o\'erstatement of$ 1.049.

The Commincc: I'q'On~ total disbursements of5598.719 for the

1994 calendar )'ear. The Audit staffddenniMd WI the Committee understated its

disbursements b)' 5197.375. This net undcrstalcmmt \\'as primaril)' duc to the follo\\·ing:

unreponed disbursements from the cw;todlal accounts maintlined b~· OSI totaling

S131.085 (sec Findin~ II.A.); unrcpo"~d disbursc:mcnts from the accounts maintained b~'

the Committee towinl 540.770; disburscmmts m3d~ from the Committee·s non-fcdcrol

account reponed as heinl made from its fcdCT31 account totalin~ 56.058: unreponed

transfers from thc custodial accounts to the Committcc·s non-fedc...1account totaling

$41.800; reponed disbursements that "'em: lal~ \'oid~ but not adjustcd for on the repons

totaling 58.S9S; and. othc:r miscellaneous I'q'Onln~ cnors thaI result in net overstatemcnt

ofSI.6:!7.

At the exit confm:nce. the Audit staff pro\'ided copies ofour 1993

and 1994 b3nk reconciliation "'orkJ"3~ and dIKUS~ the noted misstatements \\'ith

Committee officials, The Commin~ officials ackM\\ledt:cd the receipt ofthe \\Oorkpapers.

but did not offer an~' specific comments concernant: Ihe mlsst:ltemcnts. The reconciliation

\\'orkpapcr5 pro\'ided 10 thc Committee: did not Include our anal~'sis ofthe custodi..1accounts

maintained b~' 051. 12

In the interim audn n:pon. the Audit staffrecommended that thc

Comminec file amended Sum~· and Ikt;ail Summary Pal!e5 (FEe Form :lX. Pal!cs I

and 2). along \\ith accompan~'ina; Schc:duh:~ ,\ and U. :L~ appropriate. for the 1(9) and

199-' calendar )·ears 10 C01TCC1 the mlsstatc-mc:nt uf financial acti\'il)',

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In its response. the Comminee did not contest this finding. On

October 24. 1997. die Committee filed amended disclosure repons which materially

corrected the 1993 and 1994 misswcments.

c. RECORDIa:£',NC FOR CO~TRlIVTlONS FROI'IINDI\'IDVALS

Section 432(c)(3) ofTitle 2 or abe United States Code states. in pan. that

the treasurer ofa political comminee shall keep an account ofthe identification ofany

person ,,'ho makes a contribution or contributions aggregating more than $200 during a

calendar year. together "1m the date and amoW1t ofan)' such contribution.

Section 431( 13)(A) ofTitle :! ofthe United States Code states that the

term "identification" means. in the case oran~· indi\·idual. the name. the mailin~ address"

and the occupation ofsuch indi\'idu:al. as --ell as the name ofhis or her employer"

Section 43:!(i) ofTide 2 orthe United States Code states. in part. that

\\-hen the treasurer ofa political comminee sho\\"S that best effons ha\'e been used to

obtain and maintain the information required b~' this Act. an)' records ofsuch committee

shall be considered in compliance "ith this Act.

Section 104.7(b) ofTide II orthe Code of Federal Regulations states. in

pan. that the treasum' and the commill~ \\ill onl)" be deemed to ha\'e exercised best

effons to obtain the required information b~ either smding a \\Tilten request to the

contributor or makin~ an oral falUC5t 10 the contributor documented in \\Titing. The

request must clearl~· aD. for the missin~ information (i.e.• name. mailing address.

occupation. and tM name o( cmplo~'erI. inform the contributor that the reponing ofsuch .

infonnation is required b)·b,,". and the request must be made no later than thin)' (30)

cIa)'s after ~eipt o(thc contribution.IJ

The Audit staff ~\"ie\\c:d contribulluns from indi\'iduals that were greater

than 5200. or \\·hen combined \\lth othn contrihulions from the s:une person in the

calendar )·ear. exceeded 5200. One hund~d sixt~-six (166) errors. totaling $70.628. \\·ere

identified ~Iati\'e to obtlininl! and II13lntlinln,; the ~uired contributor identification; in

p:u1icular. the occupation and name of emplo~'er- The Commiu~ maintained a database

(or indi\'idual contributions \\ilich includ,-od fields to ~ord the name. mailing address.

occupation. name ofemployer. date. and amount of contribution" There was no

occupation or name of cmplo)'er recorded in the cbt:lbase for sixty-one (61 ) contributions.

Another. ninety-seven (97) entries had an occupallon and/or name: ofemployer recorded

in the database but \\"as no document:llion 10 suppon the recorded information. The

Committee did not make a\'ailable an~' sohcatallon dc:\'ices to the Audit staff.

In 5e\'ml1 illSWlCes. tIk: Commill«'s FEC disclosure rcpons contained :I

"Note to Schedule: 1\" that stllcd.

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"In some iDstances information was amined reprding a contributor's

occupation and name of employer. The Comminee omitted the

information &om the Report because, despite its 6best efrons', it ""85

unable to obtain the information (rom the contributors in question.

Regarding the Committee's 6best efTons'lo obtain the information, the

Committee routinel)' sends a lener 10 each contributor requesting that

they provide their full name, address, employer and occupation. This

letter also states that this information is requested pursuant to Federal

Election Commission regulations. A sample copy oflhis letter follo\\'5

this note."

During field",vrk, the Committee did not provide copies ofthe abo\'e

noted letters, nor did it pro,'ide documentation ",.hich demonstrated that the letters ""ere

sent to the contributors.

At the exit conference. the Audit staffprovided a schedule ofthe

documentation errors to Commincc officials. In .response to the exit conference. the

Committee provided copies ofundated I~ers that requested the missing contributor

infonnation. The Commince indicated that it had sentlhe leners to contributors ,,'ho did

not pro\'ide the requested information. The Committee also stated, "(i]t is. howe\'er. our

understanding that documentation ""hich suppons OccupationsIName ofEmployer is not

required to be maintained."

In s~·. thc Committee did not pro,-ide documentation which

demonstrated that the leam had been scnt. nor did it pro\'ide an)' contributor information.

recei\'ed as a l'CSult ofthe mailin8.

Funher. the Audit staff notes that th~ treasurer for a political committee, in

accordance "ith II CFR §104.14 and II CFR §IO:!.9(c). must preserve a copy of each

repon to be filed and maintain n:cords~ "'hich shall pro,·ide in sufficient detail the

necessary infonnation and data from ,,·hich the filed rqNlns and statements may be

verified. explained. clarified. and checked for 3Ccurac~· and completeness: for a period of

not less than three ~'ears after rqx»n is fil(d.

It is the opinion ofthe Audit staffthat the Committee did not demonstrate

that it had satisfied the best eITons requirements. The RC8ulations at II CFR

§104.7(b){2) also requin: that missin~ contributor infonnation must be requested no later

than 30 days after receipt ofthe contribution.

In the interim audit repon. the Audit stan-recommended that the

Committee:

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provide documentation \\llich demonstrates that it had met the best eITons

requirements at II CFR §104.7(b): and.

implement procedures to maintain contribution records in accordance \\ith

2 U.S.C. §432(c) and II CFR 1104.14; and.

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In its response. 1he Comminec did not pro,·ide an~· additional

documentation that demonstraled it had met the besl efTons pro,·jsions of JI CFR

§104.7(b). Further. for the contributions at issue. the Comminee did not demonstrate best

effons under either the pm·jous or the cum:nt '-mion ofthe regulations (see Footnote

13.)

The Committee:·s response Slat.:5.

..(tJhe committee: did meet its best effons requirements. but "·e cannot

make a complete sho\\ln~ of our compli:mce because our letters

mJucstina: information "en: ~-nt out ,,·ithout cblC:S•••-

Additional docummts and commcnw,' submitted b~o the Committee: did

pro\-ide e\"idc:nce of nc:". procedures ~hla~ 10 obtain or anc:mpt to obtain missing

contributor inf..'rm3Iion.

Son~thc-Ics,. the: Audit stiffI1I3lnlalnS that the Comminee has not

demonstrated that il had satisfied the best en(lr1s pm,-ision n:a;weng the acli,·il~· in

question.

I). DeMol \I£'T TIO'o. ALL(N "TID' R"TIm.

Section I().I. Itit hM •(If TIt": II u'-the: ("udc of Federal Regulations states.

in p3ft. thai in each ~pon dlsclusln(:;1 d.~hu~enl tt,r t~ dir«' costs of:l fundraisinl!

pro~ram or an cx~"t 3Cli\·il~. ;I~ d,..scrih:d an II (·rR*IOb.S. the committee: sh:lll state

the allocation f3t1u calculated for lh\: rru~r;am It, a'll\ II~ and shall expl3in the manner in

"'hich the ratio \\-as dcri,·cd.

S4:c:tion lo-a.l-lCb) ofTnIe II uftbe (·ode of Fc:dc:ral RCl:!ulations states. in

p31t. that each political committ« ~qulml to file: any repon or statement shall maintain

all records rcle\"aJlt tp such rcpons N ~l3tc:mm.~ land 5uch n:cordsl shall ",p,-ide in

sumen:nt dd3il the ncccs~ Infurm3tllln and &bb trom \\ hich Ih«: filed n:pons and

Slatc:mc:nts mal he: ,c:riracd. exrlalnc:d. 6:lmficcJ and (tk~Led for ac:CUJ'X)· and

comple1mc:ss.

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The Audit SIafT ~rcd the allocation ratios reponed by the Comminee.

As a result. we identified twenty three reponed allocation ratios where the Comminee did

not provide documentation \\1Uch delailed ho,,· the Committee calculated the ratio.

At the exit conference. the Audit stlfTrequested that the Committee

provide documenwion that delailed the calculations.

The Committee responded that sc\-eral ofthe questioned ratios "'ere

reponing errors. lbe Committcc noted that man)· ofthe C\-ents \\-ere felularly scheduled

meetings and others ,,-ere entirely non-federal C\-ents that \\-ere incorrcetl)'listed on

Schedule H-:!_ Further. the Commiuec indicated thai there \\-ere no exempt aeti\-ities for

the period. In reprds 10 the undocumented fundraisins ratios. the Committee SUlted that

"allocations \\ill need to be rn-iC\\'cd further to pro,-idc documentation ,,·hich suppons

the ratios reponed.-

_ The Audit S1afTm-ie--cd the additional documentation pro\-ided b~' the

Comminec and determined thai t\\-cl"e fundraisin~ ralios used to allocate: tlk: costs of

fundraising e"cnlS remained undocumented.

In 1M inlerim audit 1M Audit SlafTrecommended that tlx

Committcc pro'"idc documenwion \\1Iich suppons its calculation ofthe allocation ratios

used to allocatc t~ costs associated "1th the I,,"cl\'c fundraising events_

Inits n:sp'nsc:_t~ Committcc cxftl3ins that t~· could not locate any

ducumcn13uon 10 suJ'rk,n t~ disclosc:d f'm:cnl31=~s The: Cl)mmittc.: also notes th:lt most

ofthe e,"cnts "ere non-fcdc:ral C\'en15 thai \\-ena paid for "'ilb federal monies.

The Audit suITmaintains that 1M allocation ratios are undocumented.

SUI""ithstandlna;.1hc allocation tiIIlOS used I~ (-lllMliIlCC appear to be: reasonable

li,-en the: Audit stairs undcrsIandiftl: of..C\·cnb. In addition. the: Committe.: did

describe chanJcs made: to their rcponin1= pn~s abat. in the opinion oflhe Audit staff.

""Ould n:mcd~' the problem in the future.

Section 4J:!(h) ofTide :! oflbe l'nlt..-d Stain Code states. in pan. that

each political commitl« shall maintain at I~asl Oft( chc:cLin1= account and such other

accounts as comminec detmninc:s. So disburscmmls ma~" be made (othc:r than pctt~·

cash disbursements) except chccL dra\\'n on such account). A pc:tl~" cash fund for

dishurscmcnts not in excess ofSI(JU lu an~ pcncm In conn«uon \\ilh a singl~ purcha.~ or

transaction 1113~' be maintained ~. lhe: C"mmlll«.

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Section 432(c:XS) ofTitle 2 ofthe United States Code states. in pan. that

each treas1UeI' ofa political comminee shall keep an account ofthe name and address of

every person 10 whom any disbursement is made. the date. amount. and purpose ofthe

disbursement.

Seclion 102.J1 ofTille I I ofthe Code ofFederal Regulations slates. in

pan. that ifa peay cash fund is maintained. the trasum ofa political committee shall

maintain a "Tinen journal ofall disbursements. includina; the name and address ofcv~'

person to ,,110m an)" disbursemenl is made. as ,,'ell as. the dale. amount. and purpose of

such disbursement.

Durin. the disbursemenl m·i~'. the Audit saafTnoted three checks madc

pa)·able 10 Pen)" Cash totaling SJ1.000. 1Mdescriptions noted on the checks \\·c:rc.

"Volunteer Expenses." "oon·-\'olunlccr Expenses." and -GOT\' - Petl}' Cash

VoluntCCfS.·· Accordin, to the Commillcc·Smemo explanation :ltlXhcd 10 its

Schedules H-8:

-Cash disbursements "en: UKd for pl. mileage and meals for

\'oluntccrs on chc wccL-c:nd J'l'Mtr 10 election da)' and on election cia)'.

Volunteer work consiS1Cd of han,i,. lilCT:ltlft promoIin, the entire

ticket on door-knobs,

-Onl} lhc.lSC pcorlc ,,110 n:cei\cd S~OO (tr more and did not provide ..

hrcaL-do\\lI ofindividual disltuncmcnt~ arc lisled.

-~ iI\cra,e cash disburscnxm "-as 5-15.00. Our in-houK records

detail the amount. IIiUI1C and address for all cash disbuncmcnls.

Amounts rtIft,e from SIO 1&' 6~"

DurinJ racld,,·orL. Ihc (·urnmill« did not make a,"aibble for rn·iC"·. its

-In-house rcc:ords- or an~' 0Ihcr r«tt,.d~ Iha1 expbined the abo\"C transactions.

Alt~ exil confC1'mCf:" the: :\w.1 sun" qucsli,mc:d the aM'"e J'3}"mmts.

The: ('ommil1« indicated that the: J'3~ "",-nt, "cre: htr .:1«liclfl da~ c:x",:nscs, funhcr. Ilk:

CommillCC explained thai some: u' Ih«: .oJl' ,"wJ~ prU\ .dcd '«f:1f'lS. hoWL~"er. man>" of

the '''olunlccrs had onl~' pRJ\.idf:d ClktU,h m:c:.J'ls lu suppon iI ponion ofthe p:J)"rnc:nts

received,

The Audit saafT informed ("UIMI.IICC official! lhal. in accordance: \\ilh II

CFR §I01.11. cash cxpendiaurn shnuld It.: rnah: 'rum a pm)' cash fund and such

expenditUfCS should 110I exceed SInu. t- urlhc:r. the I\udil scaff explained thai the

Commincc shnuld mainlain a -nOm fC'Ccwd ofeach rcc~pI and disbursement (rom the

pett}' cash fund. and that expenditure:, .n c:\c;e:~~ &.(SIOO ~houl'" he: mads: "', ('ommiltc:c

check.

ParJe 20
19

In • ..-10Iheexit con(aence.1heCommiaee submiacd additional

doclllDalfalioa .... clclliled die _ cIisbursed 10 ach individual. Based on our

.mewofthe iafOllllllioa. Ibe Audia JIaIrdelcnnined 1b1l1he Commiace made cash

cIisbaneIIIaIII in acas or51oo 10 thiny iJIdj\ict....IOIaIu., 56.935.

Ja die i.mnaudit ..,n. die Audia JIafTIKOJIIIIICIIdcd Ihat abc

Committee implaneat pracecllftllO a peny cash (und and maimain :I ,,"linen

record o(such IIaIISICIioas in accorctancc "ilb 2l!.S.C. f432(h) and II CFR 1101.11.

-Ft.a'Ihcr.1he Auctit ..aIICOIIIIDnIdcd dIIIlhe CommiUce pIO\·idc nidcncc: ofthe

established pcay cash pmcecItns.

In .........Ihtr Commiacc iadicacd ......,. no Ionpr maintain a pcII)-

cash fund. The Commiace ........"'e)lnployea arc teimburIcd b). check upon

submiuillJ lheir receipll_" COlllcqurndy. cash disbuncmcnls no IonIcr made: 10

volumcas.

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FEDERAL EL.Ee TI~" COtlM'~ ,,,_ AU"',· "''''11,1

• . D~ "'::' ./lH

fEB Z 10 Z8 l~ '99

\\ ~""'f It ,-_ I' ....

FebruaE1' 2. 1998

p,'EMQRANDI1M

TO: RobenJ. Costa

Assistant SWfDilKtor

Audit Diyj~ '\

THROUGH: John C. surinai \ "

StaffDirec~ tI •

..",,'

FROt\1: La"TenCC M. 'Noblt

General Coa.mel

BY Kim Brigh~olcmln IU

Associate General Co~1

Rhonda J \"osdanl!h' .

AsslsWIl General Counsel

Dclanic Dc\\'ln PaanaCf I I I

Ano.., .,' * I

SUBJECT Proposed Final Audit Rcpon on ~momatlC p~)' ofIllinois

(LRA '513)

I. I~TRODlJcrIOS

The Office o(GcncraJ Counsel h:b ~\'Ie"c~ Ih~ f"uruscd FI~I Audll Rc:pun on the:

Democratic Pan)' ofIIlanois (--u.c Commll'~" t IUhmlllcd IU thiS Office on Ikccmbcr ~9" 19Q7.I

This memorandum Summarizes our commmb on the proposed n:pon. This Office concurs ,,'ith

the findan,s in the proposed repon th:at not discussed 5qW':Itel~' in this memorandum. Ir)'OU

have an)' questions COnccminl our cornmmb. plc~ conlXt llelaruc Dc\\'in Painter" the

anome~' us.~ncd 10 Ibis audal.

Becauw dw PfopoMd F... AU6I•• Rcpun dt-n IM"""~ ..... t.mlpI frum pubht d.\CIo\u,~

unckr II C F R t 41i....., OfrlC~ flCOIftIM1ICbiMi ..(0 ",1Oft dIKU" ..." document .n Optn sc,,,un

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Memora1..... to RobertJ. eo.

Democratic Pany orIllinois Final Audit Rcpoft

eLM '513)

Pqc2

II. CORDON 1£ SCHWENKME\'ER (II. A.)

.

Gordon &: Schwenkmeycr. Inc. ("OSI") is a tclemarkcting lirm th3t operatcd t\\·o kinds of

telemarketing fUndraisinS propams (or the Commincc "ilh different fee structures: one t3r~eted

"revious Comminee "pro,~.. donors. and the other =~cted ··prospecti,·e·· donor) ,\ccordln~ III

its contract \\ith the Commincc. OSI "vuld open .. cuslochal account for deposit of fund~

recei,'ed from the prolram soliciaations and rccel\·c ItS compensation and expenscs from the

funds in the account.: The conu:act specified WI OSI "ould pro,·ide the Committee: .. fin3ncl~1

stltement e"CI')· 30 cIa)·s and authorized 05110 .,thdr:a"· accrued fees o"oed to OSI and costs

incurred from the custodial checkln~ account upon prnentlllon ofthc firwlci:ll St:lh:menl 10 the

Comminee. The sole source o(aSI·s compms:ation \\-as limned b)· thc a~reemcnl1t' the

amounts il raised and depoSited into the custodial account The auditors note th:ll aSI

m3intained fi,·e sepiU'3le custodial accounts for fi\-e telemarketing pro~rams. Including 1\\"0

accounts rel~tcd to ··prospcctin~·· pro~ram~ Intended 10 ~xpand thc Committee·s contribulor base

OSI fo",,·arded net proceeds from the pro~r:uns 10 th~ Commllt~ to~hn~ Sl~I.80U dunn~ the:

audn pc:nod

In the: Int~nm Audll R~pon. Ihc alMlnors m:ommcnd~d th3t th~ Commillec: rro\·idc

documenl:lllon demonsu:aun~ that prohiblled contribullons related 10 the OSI lr:lnS3cuons did nOI

occur :md rm\"idc docummt3l1on from osa dCL1ihn~ an~ subsequent contract. C-Xlt:nslon.

amcndm~-nl or ~\ISIOn 1(11~ April'. IQQ) :lA:lft111tnt • In n:sronsc:. the COmmltle.: pro'"ided

1('IIc:r~ from the Commll1ft·~AS51SL1n1 Trcaum md lhe- rrt~ldenl orOSI asSC'nln~ Ih:lllh....

tr3ngCllon) "en: In ordl~ course of ""Slnc~. hUI did nOI pro\·id~ any documentation to

surro" thc-sc as~nlons

The Audit 513fTconcludes lut as.-s c"tmslOM of credit ~Iatcd to the '''·0 prospc:ctinl:!

rru~r:uns resultcd In :lpt'W'm1 prohl"lI~d cnnlnhullun~ .·rom GSllolhe CommlllC:c- .\i.-(- V.S.C

44IbCa). II C.F.R t 116.3. Ad\·I50~ Opinion ,-·,\(r·, IQqI·11 The: auditors note th31 nl0S1 of

the costs ofthCK prot:r:uns .~ "PJW'C1'II~ IneUrIN al IhC' outset and "·~re paid h~ aSI (rum it~

0"'" funds. 1Mn a::raduall~ n:lmhuncd as uSI rt:(C'I\C't.I e;unlnhullon~ tllthc: Commlu\.~ Thus. the

'·ommlllcc o"cd dc-bts 10 GSI :It the uut~t uftth: I"u~r~)l and \\ hc:nc\'cr rccelrt~ Inlu the:

accounl "·err In3dtq~lc10 p;a~ cost~ and (iSI fc:c~ The iJudalOn cunclude Ih:u the amount of the

outstandln~ cxtcn~lon of credla i\~ GSI eL' U( Jm~ I. ItN3 ICltahn~ SeaK.q I:! IS an ..pparcnl

prohibiltd contribullon to the Commltlee i·.S (" t~.a IN;I'

Tht eonnet provedcd 10 1M Audn suff cO~n\ 1M I't'..-J 'rom April I" I"I Ihrou~h Jul~ I. Iqq~ u"'n~

soonCf acmunalcd The COftllKl CIon ..1IIft"call, """'*lor aulornallc ~.'tft,tOft for thC' prrtnd cC'tvnC'd b~' Ilkaudal ThC' Comm'ftft hi.' ftCt prowldcd 1Oft COft'"""'~ an\ 811WftC1mC'ftb or C'\IC'"'.u", III Ihe' (un''''CI II.,

poiSlblC' IhaIW eOftlnlCI ... calCftdcd b, 'u.en l. "'C'~fl. bawd Oft IhC' awa.l.1blc: .n'urm.JIKJn. II .\ nol

etar ,'Ib" eOftUXt•• ""lCa" 10 1M per'" of 1M .

Tht IftlC"Im Aud.' RC'f'CI" .a' not \UIWn,"C'J I.. '''1\ UfflcC' ..., "" IC'- .and cummC'ftl' The: Inlt:-r.m Audll

RC'PO" also ruommC'ftdcd lhallhc Cum....nft r•• ~"'""'", ... ~'lC'cl dw tr'4IftYClaon, ".Ih (iSI The'

Commmu filed &he tcpOfb

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MelDalwJdum 10 Rabat J_ Costa

Democratic Party ofIllinois FiDaI Audit Repon

(UtA '513)

Pap 3

This Office concurs that the extensions of credit b)· OSI related to the prospectin~

programs appear to be prohibited contributions- In AO 1991·18. ~e Commission considered

similar OSI fundraisin, propams conductcd for anothcr state Democratic comminee and

concluded that. while the solicitation pro~r:un (or pro\-cn donors "'as permissible undr:r cr:n:Jin

conditions. a prosram (or prospecti\-e donors "'ould mult in prohibited contributions b~ OSI,

The Commission stated that it could nOI appro\-c the prospectin~ pro~r:un as deline:Jted in the

request because oflhe "specul:all\-c nature ofthe pro~r:un·· and the "consequent possibilities of

shonfaU" in the absence or"a record b~' Ci~1 or similar companies ofthe imrJementalion of a

pr0l!ran1 ofsimilar stNClurc and size in the ordl~' course of business,·· Ho\\·c\'~r. the:

Commission sU~J;ested altem3I1\-C remedies th31 could make prospcclin~ pr0t:rams pc:rmissible:

the political commincc could make "a subswll.al p3~-ment in ach-ance ofthe pro~r:un (or the

remainder ofdlc prolr:un) adcquaac 10 CO\'U the cxpenses ofosrs operations (or the J'r0l!~m

and to ensUR apainst nonpa~·mml of commisSIOns. Ahem:au\'el)'. the Commitl~e and 051 m:J~'

alan the pro~ram to pro\·ide for shan. defined periods in ""hich full pa~·menl is m~dc: hy the:

"mod·s end to OSI for the commissions ~d ••

The Committee and OSI !Ia\'e nol pIO\-.dcd suffiCient evidcnce th31 the prosreclln~

rro~r:uns al ISS~ "-ere permissible under the: requirements dellnealed in AO 1991·18. Thc:r~ is

no e\'idmce th:1I the Commln~ made a subs~taal p:a~menllnlo c:ach ofthe pros~cunJ;

accounts In :ad\'ancc ofthe pro~r:un adcqaulc tu Co\ cr the expenses ofas.·5 o~....uons (or the

pro';r:Im and to cns~ a,a.nst nonpa)'mc:nl o(commiSSions Funhcr. ,,-hile the contr:lct pro\'idc:s

for fil13nca~1 statcments and pa~'mcnlS10 OSI C\'~ 30 cia)·s. neither the Committee nor OSI has

pro\',dcd c\'adencc thai full p:a~'menl ,,-as conslslmll~ made 10 OSI b)' the end o( c~ch defined

period for :all commission fen and c~pm5C~ Indeed. the auditors· summary of debt b:Jl:Jnccs on

p:a~c.e q ofthe proposed rcpon .ndlClles ouua.and,n~ debt bal~ces o,,'Cd let GSI"at the close ofall

but one ofthc rcponin~ pmods Co\'crcd b~ &he audit In addluon. the fXI that the contract limits

Ihr: Commltl~-s h:abilll~ (or p:I~'mcnlS 1(\ GSllu thc: amuunls raised b~ OSI is troubhna; &;I\'cn

Ihe Inhercntl)' spcculau\'c natlft of the prospccun~ pm~r:uns and the possibilil)' th3t proceeds

"'ould nOI CO\'CT the expenses and CiSI fee~

t.tofCO\·cr. CiS..5 asscnlOns thai .b pru~r;un~ "er~ In the urdIn:&I)' course of business

under J1C,F,R t 116,3 and CORSISlent ,,'ath II~ othrr chml~ :and Indusl~' pr;aclice are i~dequa,c

absent supponln~ ducumenlallOn Adcqu:ale dUCUmCnL1110n mll=hllncludc. (or example.

contr:lClS. correspondence or othcT C"idmcc- o( GS'-, rrosl'«un~I'r0I:r:lms (or other clients_

e\'idmcc ofSimilar ~nuns in lIS IndUS1~ b, othc:r fundf2lsln~ finns. as well as additional

e\'ldence ofthe a,n:cment and connpondcnce ~I"em Ih~ Commluec and OSI.

The Audit saaffhas calculatcd an arparmt prohihllc:d contnbuuon ofS4H_qJ~ b3SCd un

the unreponcd debt owed to OSI.n cxh accounl eumlned sqw:alel~' a!\ of Janua~ J. IQQ3. An

alacmall\'e method of calculallnfl: I~ app;an:nt "".hlhlled cun,nhullun ""ould ha\'c: been 10

calcul:lIc the net debt for all oflhe xcnunl~ comhlned tU1=ethc:r :as ofJ:anu:lry I. 1993 (S33.43I )

1M calculation IS based on the Audit wtr e,f'C'"mcc: In prC\"IUU' audits "'lIh 051-s bUSiness

a~rcements "lib otha chmts. ",hleh 'J'CClficall~ f'I"hihncd OSI from Ir:ansfc:rrln~ funds bcl\\'ccn

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.........10 RabeftJ. Coal

DanocnIic PMy ofIllinois Final Audit Repon

(LRA '513)

Pap.

KCOUftts to cover any shonfalls. Thus. the AudilstilfTassumed that OSI could not ··use profits

from one propam to pay the opcratina shonfall ofanother prol!~" in a separate account.

&~ Proposed Final Audit Rcpon at pales 7 and II. AI~ughthis pro'·ision is not specificall~

included in the Comminee·s contracl ,,;Ih CiSI.1hc Audit aafl'notcs WI the contr:act docs not

specificall)" permit OS) 10 uansfC.T funds bct"'CCIllhe accounts to co'"cr shonf:lIls

While Ibis is a close issue. Ibis omc~ concurs thai the audilor·s calculation is n:aso~blc

b:lscd on the :I\-ailable information This Office: ~commcnds. ho\\·c,·cr. that lh~ Audit starr

cl:arif)· this ponion ofthe proposed rcpon 10 cxplain morc full)· ho'" the amount ofthe: :app~~nt

prohibiled contribution "'as calculated. and ha\\'lon~ the debt "-as oUlstandin~, The amaunt of

outs1:Indina; debt in the prospcclln~ accounts :&5 of Dccem~r 31. I9Q.a. S1.611. should :also

Includcd in thc amount ofthc app:umt prohibited contribution. Further. the proposed r~pon

should explain WI tht rcmainin~debt o\\cd to OSI :L\ of ~cember3 J. J99~ is not em :lpp:u-ent

prohihncd contribution because Ihc debt "115 not rcJ..t~d 10 the prospectin,; accounts. but \\'35

relatcd to ··pro\·cn" prolranls.

OSJ tr:Insfcmd funds from the cusaodaal KCC'unlS 10 ils corpolille account :and alsll

lransfcrre:d ··refunds" of pro~r:un costs from lis account Inlo lh~ "ro~r:un accounts. The "roJK's~d

rcpon concludcs t~1 refunds IOlah"l= SJI.67S al'J'C.... lei be: prohibitcd contributions from OS) to

the Committee .'t&.... C.S.C, t ....JbCa. Thl~ Office concurs. The Commil1cc has nOI pro\·ided

sufficient ducumcnlallOn that II "'as o"cd n:funds In th~ amounls 11131 OSI transferred to the

accounli. or of an, hulS for the ~funds The proposed ~pon concludes th3t the total amount of

aprwcnt prohlbltcd contnbullons IS 567.517

Flnall,. thl~ Office- a~~ Nt &he C-ommlllcc did not prol'Cl'l~' rcpon the m..jorit~" ofthe

Iransactl(1n~ "llh CiSllncludlnt: the.bts .. ""c-..t 10 CiSJ l'.S.C. § -t)4(b); II C.F.R. §§ 104.3.

I(t-1.11 I to\\c\'cr. II aJ'J'CaD ~I the: amounl~ fJ' (,ubtandln~ rcroruble debts lisled on pa~~ 9 of

lhe: proposed ~po" ,,~ nol calculated COnsIS,cntl~ "lth the calculallon of th~ amount of

apparent prohibited contributions on piI~ 7 C\f lhe.- I"0ftOsc:d rqk)n Accordin~10 th~ Audit staff.

the oUlSaandanl dcbt balance- at the bc~lnnln~ of each rcponin~ pc:nod. amounts incurrcd durin&;

each pmod. :and an) pa"mcntto (iSI 'ur c...:h n:puftlnt: pcnud \\c:r~ combined for :all ofthe

accounts 10 determine tIw: lotal amount offt'J'llrut\ltt dtthl for cach rt1'Onln~ period Con\·crsely.

the: amount of the' ~pp:an:nt prohihltcd cuntnhuu"n, "iL\ ~d on the 3mount of outsl3ndinl:! debt

In &he J'IOsp:cunl= accounlS considered JqW:Ilel~ from :an~' outst3ndln~ proceeds due 10 the:

Committee in 1M other accounlS The proposed n:pon concludcs ~1 the Comminc:c filed

amended Scheduln D dial malaWI)' conce.cd the public record. bUI 11131 the Committee reduced

the amount ofdcblS on the amended schcdule~ tt~ uUlSWldln~ procc:cds due to the: t-ommiuee.

Page 26
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Februar)· 12. 1998

Mr. John GianuJis. Treasurer

Democratic Party ofIllinois

489 Merchandise Mart

Chicago. IL 60654

Dear Mr. Gianulis:

Attached please find the Repon ofthe Audit Division on the Democratic Par1)'

ofIllinois. The Commission approved the repon on Fcbruary 6. 1998.

The Commission approved Final Audit Repon will be placed on the public

record on Februar)· 19. 1996. Should you ha,·c an)" questions regarding the public

release ofthe report. please contact the Commission's Press Office at (202) 219-4155 or

toll-free at (800) 424-9530. An)' questions )'ou ha,"C related to maners covered during

the audit or in the rcpon should be directed to Rick Halter of the Audit Division at

(202) 219-3720 or at the above loll free number.

Sincerel)',

~~Ro J. Costa

Assistant StaffDirector

Audit Division

Attachment as stated

Page 27
CJ•9•o§•2oo4
CHRONOLOGY

DEMOCRATIC PARTY OF ILLINOIS

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Audit Fieldwork

Interim Audit Report

to the Committee

Response Received to the

Interim Audit Report

Final Audit Report Approved

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