FEDERAL ELECTION COMMISSION

WASHINGTON. D.C. 204&3

December 16. 1999

MEMORANDUM

TO: RON M. HARRIS

PRESS OFFICER

PRESS OFFICE

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~,.

FROM: ROBERT J. COSTA j"2.Y b-x Hh1 <y 1)/110/"17

ASSISTANT STAFF DIRECTOR U

AUDIT DIVISION

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SUBJECT: PUBLIC ISSUANCE OF THE FINAL AUDIT REPORT ON

REPUBLICANS FOR CHOICE PAC

Attached please find a copy ofthe final audit report and related documents on

Republicans for Choice PAC which was approved by the Commission on December 2.

1999.

Informational copies ofthe report have been received by all parties involved and

the report may be released to the public on December 16, 1999.

Attachment as stated

cc: Office of General Counsel

y' Office of Public Disclosure

Reports Analysis Division

FEC Library
<rl

0' REPORT OF THE AUDIT DIVISION

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M 00 ;i;

ruwi REPUBLICANS FOR CHOICE PAC =.

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f-" Approved December 2, 1999

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FEDERAL ELECTION COMMISSION

999 E STREET, N.W.

WASHINGTON, D.C.
TABLE OF CONTENTS

REPUBLICANS FOR CHOICE PAC

PAGE

Executive Summary

Final Audit Report 5

Background 5

Findings 7

Transmittal to Committee 23

Chronology 25
A97-103

FEDERAL ELECTION COMMISSION

WASHINGTON. DC 2046.\

REPUBLICANS FOR CHOICE PAC

EXECUTIVE SUMMARY

The Republicans for Choice PAC registered with the Federal Election Commission on

January 29, 1990.

The audit was conducted pursuant to 2 V.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 arising from the audit were presented to representatives ofRepublicans for

Choice PAC (the Committee) at an exit conference held at the conclusion offieldwork on

August 13, 1998, and later in an interim audit report. The following is an overview ofthe

findings contained in the audit report.

Prohibited Loan--2USC. ~9431(8)(A)&(B)(viitand44l(a).11 CFR

§100.7(b)(ll). A review of Schedules D (Debts and Obligations) filed by the Committee

during the audit period identified loans apparently received from a corporation - not an

institution described at 2 V.S.c. ~431 (8)(8)(\'ii). It appeared that Direct Marketing Finance &

Escrow, Inc. (DMFE) made loans to the Committee, the first loan originated in August 1991

with additional loans continuing through September 1994.

In response to the interim audit report Counsel for the Committee cites to Commission

determinations in Advisory Opinion 1979-36 and MUR 3027. apparently in an attempt to

demonstrate that the transactions at issue were pennissible and did not constitute prohibited

corporate contributions. The Audit staff disagreed with this contention.

Further, Counsel for the Committee provided a reconstructed detailed schedule of

payments made by DMFE ron behalfofthe Committee1that demonstrated that DMFE

advanced a total of $1 ,066,413. Although the Committee did not provide bank statements as

recommended in the interim audit report, the Audit staff applied the Committee's fundraising

ratios utilized during the audit period (20% federal/ 80% non-federal for 1995 and 50% federal

/50% non-federal for 1996) to the DMFE fundraising expenses (loans) incurred from 1991

through 1994. The Audit staff calculated the Committee received $398,487 in prohibited

loans. The non-federal account portion ofthe loans totaled $667,926.

Page 1 of 26 Approved 12/2/99
2

Allocation of Shared Federal and Non-Federal Activities --J I CFR &9 106.6(b)(2)(i)

& (ii), (c)(I) and (2). During the period 111195 through 12/31196, the Audit staff identified

allocable administrative/generic voter drive expenses totaling $566,462. Using the funds

expended method, the Audit staff calculated such cost should have been allocated on a 76%

(federal) / 24% (non-federal) ratio for 1995 and on a 99% (federal) / I% (non-federal) ratio for

1996. Applying the above ratios, the federal account's share totaled $514,519. However,

during this period the federal account paid only $231,925, which resulted in the federal account

underpaying its share of administrative/generic voter drive expenses by $282,594 ($514,519 -

231,925).

The Committee filed an amended report disclosing a debt owed to the non-federal

account in the amount of $282,594, representing the federal account's share ofthe above

expenses.

Schedule H Reporting -- 11 CFR §§ 106.6(e)( 1) and 104.1O(b)( 1) - (4). In calendar year

hJ 1995, the Committee did not file Schedule HI (Method of Allocation for Shared Federal and

Non-Federal Administrative Expenses and Generic Voter Drive Costs), Schedule H2

(Allocation Ratios), Receipt Schedule H3 (Transfers From Non-Federal Accounts) or

Disbursement Schedule H4 (Joint FederallNon-Federal Activity Schedule). In calendar year

1996, the Committee did not file Schedules 112 or Receipt Schedules H3, however, the

Committee did file Schedules HI for each reporting period and filed Disbursement Schedules

H4 for the period February 1996 through December 1996.

In response to the interim audit report, the Committee filed amended Schedules H I and

H2 which materially disclosed the required infonnation. The Committee also filed amended

Disbursement Schedules H4. However, our review indicated that shared expenditures totaling

5>! 15,507 were not reported. The federal and non-federal share ofthe above expenditures

totaled $35,174 and $80,333 respectively.

Misstatement of Financial Activitv -- 2 U. S.C. §434(b)( I), (2) and (4).

The Audit staffs reconciliation ofthe Committee's reported activity to its bank activity

revealed material misstatements.

In response to the interim audit report, the Committee filed amended reports for

calendar years 1995 and 1996 which apparently were intended to supersede the original reports

filed. Our review ofthe amended reports indicated the Committee did not comply with the

recommendations.

Disclosure of Occupation/Name of Employer -- 2 U.S.c. §§434(b)(3)(A) & (G) and

431 (13 )(A). The results of our review indicated that in a material number of instances the

contributor's occupation and name of employer was not disclosed on Schedule A for

contributions which required itemization.

Page 2 of 26 Approved 12/2/99
3

In response to the interim audit report, the Committee filed amended reports for

calendar years 1995 and 1996. Our review ofthe amended reports indicated the Committee did

not comply with the recommendations.

Disclosurejlf Debts and Obligations -- 2 U.S.c. !S434(b)(8), II CFR && 104. I lea),

I 16.2(b), 116.8(a), (b), and (cl. The Committee disclosed only the federal portion of debts and

obligations incurred and/or paid. The non-federal portion of a debt was never disclosed. At a

minimum, $838,486 was not disclosed.

1n response to the interim audit report, the Committee filed amended reports for 1995

and 1996 which materially disclosed the above debts on Schedules D. However, our review of

the amended debt schedules indicated that debts to I I vendors were reduced by $223,590. The

Committee annotated these itemized entries with "Adjusted by Vendor" but did not provide

documentation in support ofsame. Further, the creditors did not notify the Commission by

let1er oftheir intent to forgive the above debts. In addition, the Committee did not file

amended Schedules C, as recommended, to disclose infonnation related to the DMFE loans.

Page 3 of 26 Approved 12/2/99
FEDERAL ELECTION COMMISSION

WASHINGTON. O.C 204&)

A97-103

I. BACKGROUND

A.

REPORT OF THE AUDIT DIVISION

ON

REPUBLICANS FOR CHOICE PAC

AUDIT AUTHORITY

This report is based on an audit of Republicans for Choice PAC (the

Coinmittee), undertaken by the Audit Division ofthe Federal Ejection Commission in

accordance with the provisions of the Federal Election Campaign Act of 1971, as amended

(the Act). The audit was conducted pursuant to Section 438(b) ofTitle 2 of the United States

Code which states, in part, that the Commission may conduct audits and field investigations

of any political committee required to file a report under Section 434 ofthis title. Prior to

conducting any audit under this subsection, the Commission shall perform an internal review

ofreports filed by selected committees to detennine ifthe reports filed by a particular

committee meet the threshold requirements for substantial compliance with the Act.

B. AUDIT COVERAGE

The audit covered the period January I, 1995 through December 31, 1996.

During this period, the Committee reported a beginning cash balance of $1 ,053; total receipts

for the period of $623,979; total disbursements for the period of $598,027; and an ending

cash balance of$27,005"

C. COMMITfEE ORGANIZATION

The Committee registered with the Federal Election Commission on January

29,1990. The Treasurer ofthe Committee during the period covered by the audit was Ann

E. W. Stone. Ms. Stone continues as Treasurer. The Committee maintains its headquarters

in Alexandria, Virginia. The Committee is a nonconnected organization that achieved multicandidate status on November 19, 1990.

Reported amounts are materially misstated, see Finding [J.D.

Page 5 of 26 Approved 12/2/99
2

To manage its financial activity, the Committee maintained two federal

accounts, two non-federal accounts as well as an escrow account, all with the Franklin

National Bank. The Committee established the escrow account as a clearing account and did

not consider it to be a federal account.

Receipts permissible under the Act were deposited into the escrow account

and transferred weekly to the federal account and non-federal accounts based on a 20%

(federal) 180% (non-federal) allocation for 1995 and a 50% (federal) 150% (non-federal)

allocation for 1996. The entire amount deposited into the escrow account was not reported.

However, when the Committee received a transfer offunds from the escrow account, the

value ofthe transfer was disclosed as separate transactions involving contributions from

individuals (itemizedlunitemized), list rental income or refunds/rebates in a similar

amount(s). Consequently, for calendar year 199? and 1996, reports filed by the Committee

reflected receipts at 20% and 50% of face value, respectively.

It is the Audit staffs opinion that the escrow account is a federal account of

the Committee. Therefore, all receipt and disbursement transactions should have been

reported (see Finding II.D.). The Audit staffsuggested the Committee take steps to eliminate

the escrow account, deposit federal receipts directly into a federal account and non-federal

receipts directly into a non-federal account. At the exit conference, the Committee agreed to

change its account structure.

D, AUDIT SCOPE AND PROCEDURES

The audit included testing ofthe following general categories. It should be

noted that the scope of our testing of itemized contributions from individuals was limited due

to a lack of any formal aggregation system and maintenance of contributor histories:

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

limitations;

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

from corporations or labor organizations (see Finding II.A.);

3. Proper disclosure of contributions from individuals, political

committees and other entities, to include the itemization of

contributions when required, as well as the completeness and accuracy

of the information disclosed (see Findings n.D. & n.E.);

4. Proper disclosure of disbursements including the itemization of

disbursements when required, as well as the completeness and

accuracy ofthe information disclosed;

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

1I.F.);

Page 6 of 26 Approved 12/2/99
3

6. The accuracy oftotal reported receipts. disbursements and cash

balances as compared to committee bank records (see Finding Il.D.):

7. Adequate recordkeeping of committee transactions;

8. Proper reporting and funding of allocable expenses (see Findings I1.B.

& II.C.); and,

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

Unless specifically discussed below, no material non-compliance with

statutory or regulatory requirements was detecte~. It should be noted that the Commission

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

II. AUDIT FINDINGS AND ~ECOMMENDAJlONS.

A. PROHIBITED LOAN

Section 431(8)(A)(i) ofTitle 2 of the United States Code states, in part. that

the term "contribution" includes any gift. subscription. loan. advance. or deposit of money or

anything of value made by any person for the purpose of inl1uencing. any election for Federal

office.

Section 43H8)(B)(vii) of Title 2 of the United States Code states. in part. that

the term "contribution" does not include any loan of money by a State bank, a federally

chartered depository institution, or a depository institution the deposits or accounts of which

are insured by the Federal Deposit Insurance Corporation made in the ordinary course of

business.

Section lOO.7(b)(II) ofTitle 11 ofthe Code of Federal Regulations states, in

part, that any loan of money by a State bank, a federally chartered depository institution, or a

depository institution whose deposits and accounts are insured by the Federal Deposit

Insurance Corporation is not a contribution by the lending institution ifsuch loan is made in

accordance with applicable banking laws and regulations and is made in the ordinary course

ofbusiness. (Also see Advisory Opinion 1994-26).

Section 44Ib(a) ofTitle 2 ofthe United States Code states, in part, that it is

unlawful for any corporation organized by authority of any law of Congress, to make a

contribution or expenditure in connection with any election at which presidential and vice

presidential electors or a Senator or Representative in Congress are to be voted for.

A review of Schedules D (Debts and Obligations) filed by the Committee,

during the audit period, identified loans apparently received from a corporation· not an

institution described above at 2 U.s.c. §431(8)(B)(vii). It appeared that Direct Marketing

Page 7 of 26 ADDroved] 2/2/99
-I

Finance & Escrow, Inc. (DMFE) made loans to the Committee. the first loan originated in

August 1991 with additional loans continuing through September 1994.

According to its President, DMFE is a finance company that makcs loans to

direct marketing agencies that need money to pay the up-front costs ofthe direct mail

services oftheir respective clients. A review ofdisclosure reports filed by the Committee

from 1991 through 1994 revealed that the Committee never reported the receipt ofthe loans

on Schedule A. Apparently, DMFE made payments directly to vendors for postage and list

rentals on behalfofthe Committee. The Committee incorrectly reported these transactions

as a disbursement to DMFE with the purpose listed as postage and list rental. Each

disbursement by DMFE directly to vendors constituted a loan that was not reported when

received as either a receipt on Schedule A or a loan on Schedule C. Furthermore, it should

be noted that DMFE does not qualify as a depository institution under 11 CFR §I00.7(b)( 11). ,

The August 1991 Finance and Escrow Agreement was between OMFE and

Ann E. W. Stone and Associates identified as Agency and the Committee identified as

Client. According to the Finance and Escrow Agreement, DMFE abJfeed to provide "from

time to time upon application ofClient and/or Agency" funding for "postage loans and list

prepayment loans financing housefile and/or prospect package mailings of Republican for

Choice as requested." The terms required the Agency andlor Client (the Committee] to pay

monthly interest at 6.75% or 81% annually. This agreement also specified "Agency liability

limited to 80% max[imum] due to federal & some state law."

An Agreement Regarding Consolidation And Repayment Of Republicans For

Choice (RFC) Loans, dated April 23, 1993, provided, in part, that DMFE loaned a total of

$529,246 for postage loans and/or list prepayments to the Committee to conduct direct mail

fundraising programs. "The aforesaid outstanding loan indebtedness shall bc consolidated

into one single loan sum to be designated the RFC Consolidated Loan". The terms required

repayment over 48 months at 4.5% monthly interest rate or 54% annually.

As previously noted, the initial loan document dated in August 1991 was

annotated agency liability limited to 80%. According to the Treasurer, the federal account's

liability was 20% and the non-federal account's liability was 80%. The remaining three loan

documents made available for review did not contain any such annotation. These documents

were signed by the Treasurer ofRFC and the President ofDMFE. It is possible that the 80%

120% ratio represented the Committee's 199\ fundraising allocation ratio which would bc

applied to all (1991) fundraising expenses including DMFE loan repayments 2

During the period August 1991 through September 1994, DMFE made

payments directly to vendors on behalf ofthe Committee totaling $657,627. A review of

Committee payments made to DMFE during this period appeared to indicate that the

Committee could not keep up with the agreed payment structure. In September 1994 DMFE

During the audit period the Committee' 5 allocation ratio for funds received was 20% federal I 80%

non-federal in 1995 and 50% fellerall 50% non-felleral in 1996

Page 8 of 26 ADProved 12/2/99
5

and the Committee signed an "Addendum to DMFE Finance & Escrow Agreement. ". First,

the Committee agreed to repay $669,445 (principal and certain interest) at 3.5% monthly or

42% annually over a 5 year period. Second, the Committee agreed to pay all outstanding

accrued interest, $144,538, at 0% interest over a 5 year period.

Finally, a document entitled "RFC Loan Settlement and Repayment

Agreement" made on May 22, 1997 and signed by the Treasurer of RFC and President of

DMFE on May 26, 1997 amended all previous agreements. This agreement considered a

"full, fair and final settlement of all outstanding indebtedness" existing between the parties,

required the outstanding balance, principal and interest, to be paid off in ten years at a 10%

annual interest rate.

It should be noted that an unrelated DMFE loan was addressed in MUR 3027,3

In that matter the Public Affairs Political Action Committee (PAPAC) contracted with The

Viguerie Company (TVC), an entity that provides fundraising services. TVC then

subcontracted with DMFE for a postage loan in the amount of$ll,375. The loan was repaid

in full, with interest, by PAPAC directly to DMFE. On February 5, 1990, DMFE was

notified that the Commission found reason to believe that DMFE violated 2 U.s.C. §44Ib(a).

DMFE argued that it did not make a loan to PAPAC. According to DMFE, the legal

obligation to repay the loan rested exclusively with TVC, and that DMFE "did not recognize

'PAPAC Quayle Media Bias Pkg' to be a political action committee." The Commission

ultimately approved the Office of General Counsel's recommendation to take no further

action against PAPAC and DMFE for a violation of2 U.s.c. §441b(a).

In a letter dated November 7. 1991, DMFE was notified ofthe Commission's

determination. The letter stated. in part. "the Commission reminds you that arrangements in

which third party, non-banking lenders finance the activities offederal political committees

appear to violate 2 U.S.C. §441 b(a). You should take immediate steps to insure that this

activity does not occur in the future."

It is apparent that DMFE did not take immediate steps to insure that it did not

finance the activities offederal political committees. The loans at issue were made directly

to the Committee, DMFE dealt directly with the Committee's Treasurer; there was no third

party involvect4

. All loan documents were signed by the Treasurer on behalfofthe

Committee5

. The initial loans occurred while ~.1UR 3027 was ongoing; new loans were

In an OGC brief, AO 1979-36 was addressed. OCG noted that in the AO the Commission said a direct

mail finn could advance the start-up costs ofthe mailing. However, the issue ofa third party lender was

not addressed.

It is acknowledged that the August 199\ agreement was signed by Ann Stone (for Agency) and the

Treasurer of the Committee (for Client) and specified the Agency liability at 80%. However,

subsequently all outstanding loans, including accrued interest were consolidated with the Committee

named as the sale debtor.

See footnote 4.

Page 9 of 26 Annroved 12/2/99
(j

made during a three vear period subsequent to Commission notification to DMFE ofits final

decision. Accordingly, it is the opinion of the Audit staff that the Committee received and

DMFE made a prohibited contribution of at least $813,983 ($669,445 - principal + 144,538 -

accrued interest).

This amount ($813,983) represented the highest loan balance the Audit staff

was able to verify and included outstanding principal and accrued interest. Given this

amount is allocable between the federal and non-federal accounts in proportion to the funds

ultimately deposited into each account arising from the associated direct mail efforts, the

amount ofthe apparent prohibited contribution attributable to the Committee is only a

portion ofthis amount. The Audit staff was able to veritY that in calendar year 1995 the

Committee allocated 20% of all fundraising receipts to the federal account and 80% to the

non-federal account. In calendar year 1996 the (undraising allocation was 50% federal and

50% non-federal. If those ratios were applicable'to the 1991/1992 and 1993/1994 cycles, it

would be the Audit staffs opinion that DMFE loans should be allocated in a similar

manner6 According to the Treasurer, all records relating to the above cycles were destroyed.

In an effort to determine the allocation ratios employed by the Committee in calendar years

1991 through] 994 disclosure reports were reviewed. However, since the non-federal

transactions were not reported, the federal/non-federal allocation could not be detennined.

When informed ofthe apparent prohibited contribution, the Treasurer stated

she was advised by counse! that the loans from DM!'!:: \vcre permissible and that a majority

of records relative to DMFE transactions were destroyed when a storage room nooded in

1994.

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

provide documentation that demonstrated it did not receive a prohibited contribution from

DMFE. Within the same response period provide evidence which documented the

Committee's fundraising allocation ratios for calendar years 1991 through 1994. For

example, a representative sample of bank statements for each account (federal, non-federal,

and escrow) for calendar years 199] through 1994. Finally, provide from DMFE a complete

schedule including the date and amount of all payments made directly to vendors on behalf

ofthe Committee.

[n response to the interim audit report, Counsel for the Committee stated in

relevant part that:

"DMFE and numerous comparable entities provide valuable and

indispensable commercial services to nonprofit organizations (including

political committees) and/or to their direct mail agencies. Those services are

to provide the necessary goods and services which must be purchased in

advance of mailing solicitations for contributions through the United States

In calendar year 1991 the Committee !lIed Schedule H I which rel1ected its administrative/generic voter

drive costs allocation ratio 01'20% federal and 80% non-federal. However, the Committee did not me

Schedule H2 (fundraising allocation ratio) in calendar years 1991 through 1994

Page 10 of 26 Approved 12/2/99
7

Postal Service. Goods and services which must be paid in advance could

include. for example. mailing lists. printing and mail shop services from

vendors who do not extend credit in the ordinary course oftheir businesses...

...Vendors such as DMFE, of which there are many, fill the void by buying . - - postage and other direct response marketing services for their customers.

They either contract directly with the organization or with the direct mail

agency which produces the mail for the organization. In either event. the

vendor normally draws checks payable to the Postal Service or to the

organization's mail shop which then uses the funds for postage. The typical

terms of credit, regardless whether the contract is with the organization or the

agency, require the credit to be repaid from the contributions received from

the mailing for which the credit was extended, together with interest

expressed as a percentage per month instead of per annum...

Twenty years ago, the Federal Election Commission concluded that the

extension of credit by a commercial vendor to pay the cost of preparing and

mailing fundraising materials of a political committee would not be

considered to be a campai~\l1 contribution if (1) the credit arrangement is

normal industry practice and that type of credit is extended in the ordinary

course of that vendor's business with terms substantially similar to those

given to nonpolitical, as well as political, debtors of similar risk and size of

obligation; and (2) the costs charged the political committee for that service

are at least the nonnal charge for services of that type. That conclusion was

reached by the Commission in Advisory Opinion 1979-35 [1979-361; that

being a landmark advisory opinion which had a significant influence over

industry practices, contracts and extensions of credit in the direct response

marketing industry.

...Nevertheless, we assert that the conclusion reached in Advisory Opinion

1979-36 was not expressly or implicitly restricted in its applicability to direct

mail firms. If the Commission believed it should have been so limited, the

Commission could have so stated. The issue was again squarely presented to

the Commission in MUR 3027. There, the Commission voted to approve the

Office ofGeneral Counsel's recommendation to take no further action against

DMFE. The facts in MUR 3027 were similar to those hand: DMFE advanced

postage for use by a political committee on terms of credit similar to the terms

extended to Republicans for Choice PAC. If the Commission believed in

1991 that DMFE violated 2 U.S.C. 441(b)(a), it should have voted differently

in MUR 3027...it could have enacted a regulation that proscribed extensions

of credit by third-party vendors such as DMFE."

With respect to the production of bank documentation, Counsel for the

Committee provided a letter from a bank representative, dated July 26, 1999, which gave an

Page 11 of 26 Approved 12/2/99
,'3

estimated cost for research including check copies for 60 months from] 99] - ]996 and

stated it would take approximately four to six weeks.

Finally, Counsel for the Committee stated that:

" ...During the period September ]7, ]99] through March 3, 1994, the

Committee acquired $1,066,413.20 of goods and services through DMFE in

return for which the Committee paid DMFE $1,3 ]5,258.50 through 1994."

Counsel for the Committee in his response cites to Commission

detenninations in Advisory Opinion ]979-36 and MUR 3027, apparently in an attempt to

demonstrate that the transactions at issue were permissible and did not constitute prohibited

corporate contributions. The Audit staff disagrefs. In the instance case, the facts presented

in Advisory Opinion] 979-36 are distinguishable. 7 Advisory Opinion 1979-36 addressed an

agreement between a di.rect mail firm and a political committee. That particular agreement

addressed the cost to develop and operate a direct mail program, the fee for such program,

the frequency of billing, the method of payment to the direct mail finn, and a alternative

payment provision that protects the vendor should the vendor detennine during the initial

testing period that the program was less successful than anticipated. The Advisory Opinion

also referred to an affidavit which states that "".within the direct mail industry the proposed

type of financing agreement represents an ordinary mode of operation." In the matter at

hand, DMFE issued checks directly to vendors on behalf ofthe Committee and considered

such payments as loans to the Committee. The Advisory Opinion described the relationship

between a direct mail fundraising and marketing organization and a political committee.

DMFE is in the business ofsecuring financing and escrow services for the needs ofthe direct

marketing industry.

The action taken by the Commission in MUR 3027 is described above. That

matter addressed an unrelated DMFE loan. A political committee contracted TVC to

provide fundraising services. DMFE loaned TVC money for postage. The political

committee repaid the loan directly to DMFE. In this instance, DMFE was a third party

lender. In brief, the Commission found reason to believe DMFE violated 2 U.S.C. &441 b(a).

In part, DMFE responded that it did not know it was lending money to a political committee,

since the loan in question was made to TVC and the legal obligation to repay the loan rested

exclusively with TVC. As a result, the Commission voted to take no further action against

DMFE for a violation of2 U.S.c. §44Ib(a). Finally, the Commission advised DMFE that

arrangements in which third party, non-banking lenders finance the activities offederal

political committees appear to violate 2 USc. §44 ]b(a), and that DMFE should take

immediate steps to insure that this activity does not occur in the future.

2 US.c. §437f{c)(I)(B) states that any advisory opinion rendered by the Commission under subsection

(a) of this section may be relied upon by any person involved in any spccific transaction or activity

which is indistinguishable in all its mater;al aspects frOIll the transaction or activity with respect to which

sllch advisory opinion is rendercd.

Page 12 of 26 Approved 12/2/99
9

Finally, Counsel for the Committee appears to be suggesting that since DMFE

loaned the Committee $1,066,413 and the Committee repaid $1 ,315,259 through 1994 there

is no outstanding balance and that apparently the loans were paid in full. The Committee

filed amendments for calendar years 1995 and 1996. Such amendments disclosed a debt

owed to DMFE on Schedule D (as ofJanuary 1, 1995) of$186,325 and an adjustment to the

beginning balance of($186,325) with a notation indicating that "(Amount adjusted for

payments made 1/91 - 12/94)".

Documentation made available during the audit fieldwork demonstrated that

the DMFE loans ($805,100) were still outstanding. On May 26, 1997, the President of

DMFE (Raymond J. Bowie) and the Chairman/Treasurer ofthe Committee (Ann E. W.

Stone) signed an agreement entitled "RFC Loan Settlement and Repayment Agreement".

The agreement stated that the original principal of $805,100 was still owed and. to be repaid

over a 10 year period.

Although the Committee did not provide bank statements as recommended,

the Audit staff applied the Committee's fundraising ratios utilized during the audit period

(20% federal / 80% non-federal for 1995 and 50% federal / 50% non-federal for 1996) to the

DMFE fundraising expenses (loans) incurred from 1991 through 1994.

Based on documentation provided that demonstrated that DMFE advanced a

total 01"$1 ,066,413,~ the Audit staff calculated the Committee received $398,487 in

prohibited loans. The non-federal account portion of the loans totaled $667,926.

B. ALLOCATION OF SHARED FEDERAL AND NON-FEDERAL ACTIVITIES

Section I06.6(b)(2)(i) and (iii) ofTitle 1J of the Code of Federal Regulations

states, in part, that noneonnected committees that make disbursements in connection with

federal and non-federal elections shall allocate administrative expenses including rent,

utilities, office supplies, and salaries, except for such expenses directly attributable to a

clearly identified candidate as well as the cost of generic voter drives including voter

identification, voter registration and get-out-the vote drives, or any other activities that urge

the general public to register, vote or support candidates of a particular party or associated

with a particular issue, without mentioning a specific candidate.

Sections I06.6(c)(I) and (2) ofTitle II ofthe Code of Federal Regulations

state, in part, that nonconnected committees shall allocate their administrative expenses and

costs of generic voter drives, as described in paragraph (b) of this section, according to the

funds expended method. Under this method, expenses shall be allocated based on the ratio

offederal expenditures to total federal and non-federal disbursements made by the

committee during the two-year federal election cycle. This ratio shall be estimated and

reported at the beginning of each federal election cycle, based upon the committee's federal

and non-federal disbursements in a prior comparable federal election cycle or upon the

In response to the interim audit report, Counsel for the Committee provided a reconstructed detailed

schedule of payments made by DMFE [on behalf of the Committee1.

Page 13 of 26 Approved 12/2/99
Iii

committee's reasonable prediction of its disbursements for the coming two vears. In

calculating its federal expenditures, the committee shall include only amounts contributed to

or otherwise spent on behalf ofspecific federal candidates. Calculation oftotal federal and

non-federal disbursements shall also be limited to disbursements for specific candidates, and

shall not include overhead or other generic costs. On each ofits periodic reports, the

committee shall adjust its allocation ratio to reconcile it with the ratio of actual federal and

non-federal disbursements made, to date. Ifthe non-federal account has paid more than its

allocable share, the committee shall transfer funds from its federal to its non-federal account,

as necessary, to reflect the adjusted allocation ratio. The committee shall make note ofany

such adjustments and transfers on its periodic reports.

1n calendar year 1995 the Committee allocated 20% of administrative and

generic voter drive expenses to the federal account and 80% to the non-federal account. In

calendar year 1996, the Committee allocated such expenses on a 50% (federal) / 50% (nonfederal) basis. The Committee could not provide documentation to support its calculation of

either ratio. The Treasurer did provide the Audit staff with a memorandum explaining its

efforts on the "Federal side" and "State side" as follows:

"Federal side - identify, recruit, advise and fund candidates and in

some cases actually send staff into races to help their campaigns. Also

we track some fcderal issues.

State side - identify, rccruit, advise and somctimcs fund candidates.

Spend a great deal of phonc time in rescarching issues for them and

helping them reach educated positions...We have also sent in staff (i.e.

Whitman) and help with 'on the ground' public relations (i.e.

Gilmore). We work with them on state legislative issues and advise

them of good common ground policy they should consider.

...Another major project for RFC since 1995 that has been non federal

has been the launch and promotion of the Common Ground

movement with the GOP. This has involved attending conferences,

setting up meetings with Governors and GOP Party officials...

...Also starting in 1994 we began a special project in the state of

Virginia to retake the party from the so called Christian Right. The

entire operation was run out of our offices..."

During the period 111/95 through 12/31/96, the Audit staff identified allocable

administrative/generic voter drive expenses totaling $566,462. Using the funds expended

method, the Audit staff calculated such cost should have been allocated on a 76% (federal) /

24% (non-federal) ratio for 1995 and on a 99% (federal) / J% (non-federal) ratio for 1996.

Applying the above ratios, the federal account's share totaled $514,519. However, during

this period the federal account paid only $231,925, which resulted in the federal account

Pa!.!e 14 of 26 Aooroved 12/2/99
II

underpaying its share of administrative/generic voter drive expenses by $282,594 ($514,519 -

231,925).

In developing these ratios,9 the Audit staff considered only amounts

contributed to or otherwise spent on behalf ofspecific candidates and did not include

payments for overhead and other generic costs.

In the interim audit report the Audit staffrecommended that the Committee

demonstrate that the federal account did not underpay it share of administrative/generic voter

drive expenses or reimburse the non-federal account $282,594 and provide evidence ofsuch

reimbursement. If funds were not available to make the reimbursement, this amount was to

be disclosed as a debt owed to the non-federal account.

Counsel for the Committee stated that while the Treasurer believed that her

rationale was reasonable and that it fairly reflected the activities ofthe Committee, the

Treasurer now understands and in the interest of concluding this audit, now accepts the

Commission's method of developing and applying allocation ratios to administrative and

generic voter drive expenses.

The Committee filed an amended report disclosing a debt owed to the nonfederal accoun1 in the amount of$282,594, representing the federal account's share of the

above expenses.

C. SCHEDULE H REPORTING

Section! 06.6(e)( I) ofTitle II of the Code of Federal Regulations states, in

relevant part, that committees that have established separate federal and non-federal

accounts, shall pay the expenses ofjoint federal and non-federal activities by either of the

following: The committee shall pay the entire amount of an allocable expense from its

federal account and shall transfer funds from its non-federal account to its federal account

solely to cover the non-federal share ofthat aHocable expense; or the committee shaH

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.

Sections 104.1O(b)(l) and (2) ofTitle II of the Code of Federal Regulations

state, in part, that in the first report in a calendar year disclosing a disbursement for

administrative expenses or generic voter drives, the committee shall state the allocation ratio

to be applied to these categories of activity, and the manner in which it was derived. In each

subsequent report in the calendar year itemizing an al10cated disbursement for administrative

expense or generic voter drives, the committee shall state the category of activity for which

each allocated disbursement was made, and shall summarize the total amount spent by the

federal and non-federal accounts that year, to date, for each such category. Non-connected

9 It was noted that the ratios used by the Committee were the same ratios it used to allocate

correctly fundraising expenses for calendar years 1995 and 1996.

Page 15 of 26 Aporoved J2/2/99
12

committees that have allocated expenses according to the funds expended method shall also

report in a memo entry the total amounts expended in donations and direct disbursements on

behalfofspecific state and local candidates, to date, in that calendar year. Further, in each

report disclosing a disbursement for the direct costs of a fundraising program or an exempt

activity, the committee shall assign a unique identifYing title or code to each such program or

activity, shall state the allocation ratio calculated for the program or activity and shall

explain the manner in which the ratio was derived.

Sections 104.10(b)(3) and (4) ofTitle 11 ofthe Code of Federal Regulations

state, in part, that a political committee that pays allocable expenses in accordance with 11

CFR I06.5(g) or 106.6(e) shall report each transfer offunds from its non-federal account to

its federal account or to its separate allocation account for the purpose of paying such

expenses. Further, a political committee that pays allocable expenses in accordance with 11

CFR 106.5(g) or 106.6(e) shall also report each disbursement from its federal account or its

separate allocation account in payment for ajoint federal and non-federal expense or

activity.

The Committee did not establish an allocation account nor did it pay all

shared expenses from its federal accounts and seek reimbursement from the non-federal

accounts. Instead, for all shared expenses, the Committee issued vendors two checks, one

from a federal account and another from a non-federal accollnt, which purportedly

represented their respective share.

In calendar year 1995, the Committee did not file Schedule HI (Method of

Allocation for Shared Federal and Non-Federal Administrative Expenses and Generic Voter

Drive Costs), Schedule H2 (Allocation Ratios), Receipt Schedule H3 (Transfers From NonFederal Accounts) or Disbursement Schedule H4 (Joint FederallNon-Federal Activity

Schedule). In calendar year 1996, the Committee did not file Schedules H2 or Receipt

Schedules H3, however, the Committee did file Schedules HI for each reporting period and

tiled Disbursement Schedules H4 for the period February 1996 through December 1996.

Itemization of Shared Disbursements

As previously stated, the Committee did not file Disbursement Schedules H4

until February 1996 and paid shared expenses with separate checks from the federal and nonfederal accounts. Prior to filing Disbursement Schedules H4, the Committee disclosed on

Schedule B (Itemized Disbursements) only the amount ofthe check issued from the federal

account representing the federal share of a fundraising, administrative or generic voter drive

expense. The amount ofthe check issued from the non-federal account for the non-federal

share ofthe same expense was never disclosed.

Even though in February 1996 the Committee began filing Disbursement

Schedules H4 and disclosed the federal and non-federal account's share of allocable

Page 16 of 26 Aoproved 12/2/99
/3

expenses, it continued to disclose the federal account's share on Schedule B. The above

practices resulted in numerous portions ofshared expenses either not being reported as was

the case from January 1995 through January 1996 or being reported twice as was the case

from February) 996 through December) 996.

The Committee was infonned of an reporting deficiencies/errors noted above

and agreed to file the necessary amendments for 1995 and 1996.

In the interim audit report the Audit staffrecommended that, the Committee

file amendments for 1995 and 1996 to correct the reporting deficiencies/errors noted above,

including the duplicate reporting of certain shared expenses on Schedules B. The

amendments should have included the following:

• Schedules HI for 1995 and 1996 disclosing the allocation ratio to bc applied

to all payments for shared administrative/generic voter drive expcnses and the

manner in which it was derived.

• Schedules H2 for] 995 and 1996 disclosing a unique identifying title or code

to each such program or activity, including the allocation ratio calculated for

the program or activity and the manner in which the ratio was dcrivcd.

Further, a summary of the total amounts spent by the federal and non-federal

accounts that year, to date, tor each such program or activity

• Disbursement Schedules H4 for 1995 and 1996 disclosing all shared federal

and non-federal activity, to include the full name, address of each person to

whom the disbursement was made, and the date, amount and purpose of each

such disbursement, along with the total amount expended by the committee

that year, to date, for each category or activity.

In response to the interim audit report, the Committee filed amended

Schedules HI and H2 which materially disclosed the required infonnation. The Committee

also filed amended Disbursement Schedules H4. However, our review indicated that shared

expenditures totaling $1] 5,507 were not reported. The federal and non-federal share of the

above expenditures totaled $35,174 and $80,333 respectively (see Finding TID.).

D. MISSTATEMENT OF FINANCIAL ACTIVITY

Sections 434(b)(I), (2), and (4) ofTitle 2 ofthe United States Code state, in

part, that a political committee shall disclose the amount of cash on hand at the beginning of

the reporting period and the total amount of all receipts and the total amount of all

disbursements for the reporting period and calendar year.

As previously stated, receipts permissible under the Act were deposited into

an escrow account and transferred weekly to federal and non-federal accounts based on a

20% (federal) /80% (non-federal) allocation in calendar year 1995 and on a 50% (federal) /

Page 17 of 26 Approved 12/2/99
50% (non-federal) allocation in calendar year 1996. The Committee disclosed only the

federal allocable share. The Audit staff considered the escrow account as a federal account.

As a result, the Audit staffs reconciliation ofthe Committee's reported activity to its bank

activity revealed material misstatements.

For calendar year 1995, beginning cash on hand was understated $9,09& and

total receipts were understated $480,606, both figures for the most part were understated

because the Committee did not disclose the full value ofreceipts deposited into the escrow

account. In a similar vein disbursements were understated by $488,811; the Committee did

not disclose the full value of disbursements made from the escrow account.

For calendar year 1996 receipts were understated by $308,207 and

disbursements were understated by $333,772, d~ primarily to the Committee Dot disclosing

the full value ofthe individual transactions in the escrow account. Ending cash on hand was

overstated by $24,291, the net result ofthe reporting errors.

Furthermore, with respect to itemized receipts, the Committee disclosed only

20% ofthe amount in 1995 and 50% in 1996. As a consequence, every itemized entry was

understated.

The Committee was provided a schedule of all reporting errors and agreed to

file amendments for 1995 and 1996 to correct the public record.

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

file amended reports for 1995 and 1996 to correct the reporting deficiencies noted above.

In response to the interim audit report, the Committee filed amended reports

for calendar years 1995 and 1996 which apparently were intended to supersede the original

reports filed. Our review ofthe amended reports indicated the Committee did not comply

with the recommendations as follows:

Beginning Cash on Hand and Receipts

• The understatement ofreported cash on hand ($9,098) at January 1, 1995

has not been corrected.

• The Committee reported on line 18 transfers from the non-federal account

for joint activity totaling $112,014 for calendar year 1995 and $208,251

for calendar year 1996. The Committee also filed supporting Receipt

Schedules Hl However, no such transfers were made by the non-federal

account or received by the Committee during the audit period. It appears

thcse transfers were meant to offset $112,014 and $208,251 in expenses

paid directly by the non-federal account but included in the amended

reports as if paid by the federal account.

Page 18 of 26 Anoroved 12/2/99
15

• The Committee did not disclose the amount ($9,706) of dividends and/or

interest or the amount ($3,856) ofrefundsirebates received in 1995 and

1996.

• Finally, a material amount of contributions from individuals, aggregating

in excess of $200, were not itemized on Schedule A.

Disbursements

• The Committee under-reported the amount oftransfers to affiliated/other

party committees by $29,623 for calendar year 1995.

• Although disclosed on the original reports, the amount ($30,574) of

contributions to federal candidates/committees and other political

committees was not disclosed on the amended reports for 1995 and 1996.

• Although disclosed on the original reports, the amount ($27,279) of other

federal operating expenditures was not reported on the amended reports

for 1996.

• For calendar year 1995 shared expenditures disclosed on Disbursement

Schedule H4 totaling $303,348 were not included or otherwise accounted

for in the reported totals. Additionally, for both calendar years 1995 and

1996, our review identified shared expenditures totaling $115,507

($35,174 paid from the federal account and $80,333 paid from the nonfederal account) that were not itemized on Disbursement Schedules H4 or

properly accounted for in the reported totals.

E. DISCLOSURE OF OCCUPATlONfNAME OF EMPLOYER

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

part, that each report under this section shall disclose the identification of each person who

makes a contribution or provides any dividend, interest, or other receipt to the reporting

committee during the reporting period, in an aggregate amount or value in excess of $200

within the calendar year, together with the date and amount of any such contribution/receipt.

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

in the case of any individual, as the name, the mailing address, and the occupation ofsuch

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

The results of our review indicated that in a material number of instances the

contributor's occupation and name of employer was not disclosed on Schedule A for

contributions which required itemization. In almost every instance, the missing contributor

infonnation was found in the Committee's records; the infonnation was included on a

solicitation response device completed by the contributor. In lieu of disclosing such

Page 19 of 26 Aooroved 12/2/99
/6

infonnation, the itemized entries generally included the term "Best Efforts." Since the

occupation/name of employer information was apparently received at the same time as the

associated contribution, inclusion ofthe tenn "Best Efforts" as part ofthe entry for a given

contribution was inaccurate at best. The Committee did not know why the contributor's

occupation and name of employer was not disclosed on its reports.

In the interim audit report, the Audit staffrecommended that the Committee

file amended Schedules A for 1995 and 1996 to disclose the contributor infonnation

contained within its records.

The Committee filed amended reports for calendar years 1995 and 1996.

However, the amendments did not correct the reporting problems noted above. The Audit

staffs original testing documented 41 itemized ~ntries that did not contain the contributor's

occupation and/or name of employer. As previously stated, in almost every instance the

missing contributor infonnation was contained in the Committee's records. Ofthis total

(41 ), the Committee did not include 35 ofthe contributions disclosed on its initial reports on

its amendments. Further, for two entries disclosed on the amendments the occupation/name

of employer was listed as "info req" [infonnation requested) when, in fact, the infonnation

provided by the contributor was contained in the Committee's records. The Committee, on

the amendments filed, included occupation/name of employer information for only 4 ofthe

4 I exceptions noted.

F. DISCLOSURE OF DEBTS AND OBLIGATIONS

Section 434(b)(8) of Title 2 urthe United States Code states, in part, that each

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

obligations owed by or to such political committee.

Section 104.II(a) of Title II of the Code of Federal Regulations states, in

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

outstanding shall be continuously reported until extinguished.

Section 116.2(b) ofTitle II ofthe Code of Federal Regulations states that

ongoing committees shall not settle any outstanding debts for less than the entire amount

owed, but may request a Commission determination that such debts are not payable under 11

CFR 116.9, and may resolve disputed debts under 11 CFR 116.10. Creditors may forgive

debts owed by ongoing committees under the limited circumstances provided in II CFR

116.8.

Section 116.8 (a) ofTitle II ofthe Code of Federal Regulations states, in part,

that a creditor may forgive the outstanding balance of a debt owed by an ongoing committee

ifthe creditor and the ongoing committee have satisfied the requirements of II CFR 116.3

and 116 .5, as appropriate, and the debt has been outstanding for at least twenty-four months,

and 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

Page 20 of 26 Aooroved 12/2/99
I

,.·,," J.JI

J7

cash on hand to pay the creditor; has receipts and disbursements ofless than $1,000 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.

Sections 116.8(b) and (c) of Title II ofthe Code ofFederal Regulations state,

in part, that a creditor that intends to forgive a debt owed by an ongoing committee shall

notify the Commission by letter of its intent. Upon the Commission's request, the ongoing

committee or the creditor shall provide such additional information as the Commission may

require to review the creditor's request. The Commission will review each request to forgive

a debt to detennine whether the ongoing committee and the creditor have complied with the

requirements of II CFR part 116, and whether or not the forgiveness of the debt would result

in an apparent violation ofthe Act or the Commission's regulations.

Consistent with its reporting of allocable expenses, the Committee disclosed

only the federal portion of debts and obligations incurred and/or paid. The non-federal

portion of a debt was never disclosed. At a minimum, $838,486 related to the non-federal

portion was not disclosed.

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

file amended Schedules D (Debts and Obligations Excluding Loans) for 1995 and 1996 to

disclose both the federal and non-federal portion of all debt, except for DMFE loans, which

resulted from shared activity. DMFE loans should have been disclosed on Schedule C

(Loans).

The Committee filed amended reports for 1995 and 1996 which materially

disclosed the above debts on Schedules D. However, our review of the amended debt

schedules indicated that debts to II vendors were reduced $223,590. The Commil1ee

annotated these itemized entries with "Adjusted by Vendor" but did not provide

documentation in support of same. Further, the creditors did not notify the Commission by

letter oftheir intent to forgive the above debts. In additIOn, the Committee did not file

amended Schedules C, as recommended, to disclose information related to the DMFE loans.

Page 21 of 26 ADDroved 12/2/99
Paee 22 of 26 ADDfoved 12/2/99
FEDERAL ELECTION COMMISSION

WASHINCTON, DC ]04bJ

December 9. 1999

Ms. Ann E. W. Stone, Treasurer

Republicans for Choice PAC

2760 Eisenhower Avenue

Suite 260

Alexandria. Vir!!inia 22314

Dear Ms. Stone:

Attached please tind the Report of the Audit Division on Republicans for Choice

PAC. The Commission approved the report on December 2, ]999,

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

on December ]6. 1999. Should you have any questions regarding the public release of the

report, please contact the Commission's Press Office at (202) 2] 9-4155.

Any questions you have related to matters covered durin,!! the audit or in the report

should be directed to Jeff Spilizewski or Tom Nurthen of the Audit Division at (202)

694-1200 or toll free at (800) 424-9530.

Sincerely.

~Robert 1. Costa

Assistant Staff Director

Audit Division

Attachment as stated

Page 23 of 26 Approved 12/2/99
•

Page 24 of 26 Approved 12/2/99
CHRONOLOGY

REPUBLICANS FOR CHOICE PAC

Audit Fieldwork

Interim Audit Report to

the Committee

Response Received to the

Interim Audit Report

Final Audit Report Approved

06/22/98 - 08/13/98

04/16/99

08/13/99

12/02/99

Page 25 of 26 Approved 12/2/99
1"; .,

Page 26 of 26 Aooroved 12/2/99
I ru

'1'

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