Part I
Background

Authority for Audit

This report is based on an audit of the Dole North Carolina Victory Committee Inc.
(DNCVC), undertaken by the Audit Division of the Federal Election Commission (the
Commission) in accordance with the Federal Election Campaign Act of 1971, as
amended (the Act). The Audit Division conducted the audit pursuant to 2 U.S.C.
§438(b), which permits the Commission to conduct audits and field investigations of any
political committee that is required to file a report under 2 U.S.C. §434. Prior to
conducting any audit under this subsection, the Commission must perform an internal
review of reports filed by selected committees to determine if the reports filed by a
particular committee meet the threshold requirements for substantial compliance with the
Act. 2 U.S.C. §438(b).

Scope of Audit

The audit examined:

1. The receipt of excessive contributions and loans.

The receipt of contributions from prohibited sources.

The disclosure of contributions received.

The disclosure of disbursements, debts, and obligations.
The consistency between reported figures and bank records.
The completeness of records.

Other committee operations necessary to the review.

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Changes to the Law

On March 27, 2002, President Bush signed into law the Bipartisan Campaign Reform Act
of 2002 (BCRA). The BCRA contains many substantial and technical changes to the
federal campaign finance law. Most of the changes became effective November 6, 2002.
Except for the period November 6, 2002, through December 31, 2002, the period covered
by this audit pre-dates these changes. Therefore, the statutory and regulatory
requirements cited in this report are primarily those that were in effect prior to November
6, 2002.

Misappropriation of Committee Funds

During the period covered by the audit, the Assistant Treasurer of DNCVC, Earl Allen
Haywood, wrote unauthorized checks from the committee's account designating himself
as payee. The payments to Mr. Haywood were not reported or reported as postage
expenses on original reports filed by DNCVC.

Mr. Haywood's duties included collecting and recording contributions to DNCVC,
depositing the funds in the appropriate bank accounts, accounting for funds received by
DNCVC, tracking all disbursements from DNCVC, and reporting this information to the
Commission.


¢ Refund the contribution to the contributor and note the refund on the report
covering the period in which the refund was made. 11 CFR §103.3(b)(1).

C. Contributions from Limited Liability Companies (LLCs)

© Section 110.1(g)(1) of the Code of Federal Regulations defines a “limited
liability company” (LLC) as a business entity that is recognized as a limited
liability company under the laws of the state in which it is established.

¢ Section 110.1(g)(2) states that a contribution by an LLC that elects to be
treated as a partnership by the Internal Revenue Service pursuant to 26 CFR
301.7701-3, or does not elect treatment as either a partnership or a corporation
pursuant to that section, shall be considered a contribution from a partnership
pursuant to 11 CFR 110.1(e).

¢ Section 110.1(g)(3) states that an LLC that elects to be treated as a corporation
by the Internal Revenue Service, pursuant to 26 CFR 301.7701-3, or an LLC
with publicly-traded shares shall be considered a corporation pursuant to 11
CFR Part 114.

© Section 110.1(g)(4) states that a contribution by an LLC with a single natural
person member that does not elect to be treated as a corporation by the
Internal Revenue Service pursuant to 26 CFR 301.7701-3 shall be attributed
only to that single member.

¢ Section 110.1(g)(5) states, in part, that an LLC that does not elect to be treated
as a corporation by the Internal Revenue Service shall, at the time it makes a
contribution, provide information to the recipient committee as to how the
contribution is to be attributed, and affirm to the recipient committee that it is
eligible to make the contribution.

Facts and Analysis

On its amended reports covering the first half of 2003, DNCVC reported the receipt of
numerous contributions, many from business entities. The Audit staff reviewed
contributions deposited into DNCVC’s bank accounts and determined that 55
contribution checks, totaling $104,720, dated between April and November 2002, were
apparently held for many months before being deposited into a DNCVC account in
January and April 2003. Verification with the appropriate Secretary of State offices
revealed that 31 of the 55 items, totaling $81,320, were corporate contributions.

These 31 corporate checks ranged in amount from $25 to $25,000. It should be noted
that 12 of the 31 checks totaling $18,150 were made out to DNCVC and that 18 checks
totaling $62,670 were made out to Dole Victory Committee. Additionally, there was one
check with no payee. The Dole Victory Committee was a different joint fundraising
committee headquartered in Washington, DC affiliated with Senator Dole and the
National Republican Senatorial Committee. It is not clear whether these checks were


Part II

Overview of Committee
Committee Organization

Important Dates

Dole North Carolina Victory Inc.

¢ Date of Registration

May 31, 2002

e Audit Coverage

May 31, 2002 —- December 31, 2002

Headquarters

Alexandria, Virginia

Bank Information

e Bank Depositories

2

e Bank Accounts

2 Accounts (1 Checking; 1 Sweep)

Treasurer

¢ Treasurer When Audit Was Conducted

Mr. Mike Mitchell

¢ Treasurer During Period Covered by Audit

Mr. Mike Mitchell

Management Information

¢ Attended FEC Campaign Finance Seminar _| No

e Used Commonly Available Campaign Yes
Management Software Package

e Who Handled Accounting and Paid Staff

Recordkeeping Tasks

Overview of Financial Activity
(Audited Amounts)

Cash on hand @ May 31, 2002 $0
o Contributions from Individuals $ 2,371,384
o Contributions from Political Committees 170,316
oO. Transfers from Other Party Committees 41,300
oO. All Other Receipts 426
Total Receipts $ 2,583,426
o Operating Expenditures $ 527,356
o. Transfers to Affiliates 1,899,468
o All Other Disbursements 76,250
Total Disbursements $ 2,503,074
Cash on hand @ December 31, 2002 $ 80,352


DNCVC retained the services of an outside consultant to determine the extent of the
misappropriation and to file amended reports with the Commission. That review
identified a total of $70,750 in misappropriated funds during 20027. No additional
amounts were noted during the audit. Mr. Haywood pleaded guilty to the resulting
criminal charges.

Amended reports were filed prior to DNCVC being notified of the Commission’s audit.
The audit compared the corrected reports to the financial records.

In communications with the Commission, DNCVC legal Counsel has taken the position
that Mr. Haywood was hired by DNCVC for the sole purpose of insuring proper
accounting, bookkeeping, and reporting to the Commission of the Committee's receipts
and disbursements. Counsel further states that the DNCVC relied upon Mr. Haywood's
reputation and had therefore taken all reasonable steps in establishing proper internal
controls based upon that reputation.

Regardless of Mr. Haywood’s reputation, in the opinion of the Audit Staff, the lack of
basic internal controls (e.g. separation of duties) and oversight by DNCVC created an
environment that contributed to the misappropriation of funds and the misreporting to the
Commission.

2 In 2003 Mr. Haywood misappropriated an additional $104,001.


Part IV
Findings and Recommendations

Finding 1. Prohibited Contributions/Timely Deposit of
Contributions

Summary

DNCVC received 55 contribution checks totaling $104,720 dated between April and
November 2002, which were not deposited until 2003. Thirty-one of these contributions
totaling $81,320 were verified as being from corporations. In response to the interim
audit report DNCVC reiterated its position that it was not responsible for returning the
contributions because Mr. Haywood stole the proceeds and its reliance on his reputation
constituted adequate internal controls.

Legal Standards

A. Receipt of Prohibited Corporate Contributions. Political committees may not
accept contributions made from the general treasury funds of corporations. This
prohibition applies to any type of corporation including a non-stock corporation, an
incorporated membership organization, and an incorporated cooperative. 2 US.C.
$44 1b.

B. Questionable Contributions. If a committee receives a contribution that appears to
be prohibited (a questionable contribution), it must follow the procedures below:

1. Within 10 days after the treasurer receives the questionable contribution, the
committee must either:
© Return the contribution to the contributor without depositing it; or
© Deposit the contribution (and follow the steps below). 11 CFR §103.3(b)(1).

2. If the committee deposits the questionable contribution, it may not spend the
funds and must be prepared to refund them. It must therefore maintain sufficient
funds to make the refunds or establish a separate account in a campaign
depository for possibly illegal contributions. 11 CFR §103.3(b)(4).

3. The committee must keep a written record explaining why the contribution may
be prohibited and must include this information when reporting the receipt of the
contribution. 11 CFR §103.3(b)(5).

4. Within 30 days of the treasurer’s receipt of the questionable contribution, the
committee must make at least one written or oral request for evidence that the
contribution is legal. Evidence of legality includes, for example, a written
statement from the contributor explaining why the contribution is legal or an oral
explanation that is recorded by the committee in a memorandum. 11 CFR
§103.3(b)(1).

5. Within these 30 days, the committee must either:
© Confirm the legality of the contribution; or



FEDERAL ELECTION COMMISSION

WASHINGTON, D.C. 20463

October 31, 2005

MEMORANDUM

TO: ROBERT W. BIERSACK
PRESS OFFICER
PRESS OFFICE

FROM: JOSEPH F. STOLTZ KS °
ASSISTANT STAFF DIRECTDR
AUDIT DIVISION

SUBJECT: | PUBLIC ISSUANCE OF THE FINAL AUDIT REPORT ON
THE DOLE NORTH CAROLINA VICTORY COMMITTEE INC.

Attached please find a copy of the final audit report on the Dole North Carolina
Victory Committee Inc., which was approved by the Commission on October 7, 2005.

Informational copies of the report have been received by all parties involved and
the report may be released to the public on November 1, 2005.

Attachment as stated

ce: Office of General Counsel
Office of Public Disclosure
Reports Analysis Division
FEC Library
Web Manager


refunds by submitting copies of the front and back of each refund check negotiated by the
contributor. If funds were not available to make the necessary refunds, then the refund
amount due was to be disclosed on Schedule D (Debts and Obligations) until funds
became available to make the refunds. It was further recommended that, if necessary,
DNCVC should have sought the return of funds previously disbursed to the participants
in order to execute the refunds.

Committee Response and Audit Staff Assessment

In response to the interim audit report, DNCVC reiterated its position that the acceptance,
failure to report and subsequent embezzlement of the prohibited contributions was the
sole responsibility of Mr. Haywood. The response further stated that if refunds are
required, he should be responsible for making them. DNCVC claimed that its reliance on
Mr. Haywood's reputation constituted sufficient internal controls to safeguard the
contributions, fulfill the committee's obligation to its contributors, and ensure compliance
with the Commission's regulations. DNCVC further stated that nothing in the Act or the
regulations required it to maintain any specific level of internal controls and that it was
being treated unfairly given that it was the victim of the crime.

The Audit staff agrees that the regulations do not require specific internal controls,
however, the regulations do require that a committee file accurate and complete reports,
pursuant to 11 CFR§104. DNCVC chose to rely on one person's reputation and honesty
rather than establishing a system where duties were segregated to provide checks and
balances. That reliance allowed the embezzlement to occur and inaccurate disclosure
reports to be filed.

The Audit staff notes that DNCVC recovered $19,001 in May of 2003 and that the United
States District Court for the District of Columbia ordered Mr. Haywood to make
restitution to DNCVC in the amount of $155,750, the remainder of the stolen funds. The
amount of the ordered restitution included the contributions identified as prohibited by
the Audit staff. Mr. Haywood made a payment of $50,000 that was allocated between
DNCVC and a second committee that Mr. Haywood embezzled funds from. Of this
amount, $18,950 was allocated to the other committee (100% of the amount taken) and
$31,050 was allocated to the DNCVC. The DNCVC reported the receipt of the $31,050
in its July 2005 Quarterly Report.

The Audit staff concludes that DNCVC still bears the responsibility for the return of the
prohibited contributions.

| Finding 2. Disclosure of Occupation/Name of Employer

Summary
A review of receipts indicated that DNCVC did not disclose the occupation and/or name

of employer for 421, or 29%, of the contributions from individuals itemized on its
disclosure reports. The required information for these items was not maintained in
DNCVC’s records; however, subsequent to the exit conference DNCVC staff obtained


intended for the other committee with a similar name or were the result of the
contributors using an abbreviated payee. If the checks were meant for the other
committee it is not clear how they came into the possession of the DNCVC.> These
contributions were not transmitted to any other committees or joint fundraising
participants and contribution refunds were not issued. Included in the 12 contributor
checks made out to DNCVC were two from one corporation totaling $9,075 ($9,000 +
$75). Included in the 18 checks made out to Dole Victory Committee were two from a
corporation totaling $10,000 ($1,000 + $9,000), a $10,000 corporate check, and a
$25,000 check from another corporation.

Among the 31 apparent corporate contributions were three totaling $800 from Limited
Liability Companies (LLCs). No documentation was located within DNCVC files to
establish the permissibility of these contributions. As noted above, an LLC must provide
information to the committee that it is eligible to make such contributions.

Further, North Carolina State Law prohibits corporate contributions except from

“ independent, non-profit corporations that promote social, educational, or political
ideas, which are limited to $4,000 per candidate campaign or other political committee
per primary, second primary, and general election.”* None of these corporate
contributions were acceptable to any of the joint fundraising participants.

As discussed above in the Part I (Background), the DNCVC Assistant Treasurer, Mr.
Haywood, wrote unauthorized disbursements to himself during the period covered by the
audit. In 2003, shortly after these contributions were deposited, he wrote additional
unauthorized checks to himself totaling $104,001, according to 2003 DNCVC reports.
This matter was discussed with DNCVC officials at an end of fieldwork meeting and they
stated that they did not know how Mr. Haywood obtained these contribution checks,
especially the ones payable to Dole Victory Committee. They added that as far as they
were concerned, these checks were never intended for DNCVC and therefore DNCVC
should not be responsible for making contribution refunds. When the Audit staff pointed
out that at least 12 of the 31 checks were made out to DNCVC and that all 31 were
deposited into a DNCVC bank account, DNCVC officials responded that they should not
be held accountable for Mr. Haywood’s actions because he had held these checks for his
embezzlement scheme and that by the time these checks were deposited, the joint
fundraising activities had concluded.

Interim Audit Report Recommendation

The Audit staff recommended that DNCVC provide evidence that the 31 contributions
totaling $81,320 were not prohibited. Regarding the three contributions from LLCs, such
documentation was to include a statement from each LLC or a copy of an IRS form 8832
(Entity Classification Election) indicating that it had not elected to be treated as a
corporation by the Internal Revenue Service and was therefore eligible to make such a
contribution. Absent such evidence, DNCVC was to issue refunds and document such

> According to DNCVC representatives, Mr. Haywood did not have any association with the Dole Victory
Committee.
+ Campaign Finance Laws 2002 (Federal Election Commission)



Part III
Summaries

Findings and Recommendations

Finding 1. Receipt of Prohibited Contributions/Timely
Deposit of Contributions

DNCVC received 55 contribution checks totaling $104,720 dated between April and
November 2002, which were not deposited until 2003. Thirty-one of these contributions
totaling $81,320 were verified as being from corporations. In response to the interim
audit report DNCVC reiterated its position that it was not responsible for returning the
contributions because Mr. Haywood stole the proceeds and its reliance on his reputation
constituted adequate internal controls. (For more detail, see p. 5)

Finding 2. Disclosure of Occupation/Name of Employer

A review of receipts indicated that DNCVC did not disclose the occupation and/or name
of employer for 421, or 29%, of the contributions from individuals itemized on its
disclosure reports. The required information for these items was not maintained in
DNCVC’s records; however, subsequent to the exit conference DNCVC staff obtained
the missing information for 189 of the 421 errors. In response to the interim audit report,
DNCVC filed amended reports that included most of the information they had obtained.
(For more detail, see p. 8)


Table of Contents

Part I. Background
Authority for Audit
Scope of Audit
Changes to the Law
Misappropriation of Committee Funds

Part II. Overview of Committee
Committee Organization
Overview of Financial Activity

Part III. Summaries
Findings and Recommendations

Part IV. Findings and Recommendations
Finding 1. Receipt of Corporate Contributions/
Timely Deposit of Contributions
Finding 2. Disclosure of Occupation/Name of Employer

Page

Bee


Report of the Audit Division
on the

Dole North Carolina Victory
Committee Inc.

May 31, 2002 —- December 31, 2002



Report of the
Audit Division on the
Dole North Carolina Victory

Committee Inc.
May 31, 2002 - December 31, 2002

Why the Audit
Was Done

Federal law permits the
Commission to conduct
audits and field
investigations of any
political committee that is
required to file reports
under the Federal
Election Campaign Act
(the Act). The
Commission generally
conducts such audits
when a committee
appears not to have met
the threshold
requirements for
substantial compliance
with the Act.' The audit
determines whether the
committee complied with
the limitations,
prohibitions and
disclosure requirements
of the Act.

Future Action
The Commission may
initiate an enforcement
action, at a later time,
with respect to any of the
matters discussed in this

report.

About the Committee (p. 3)

The Dole North Carolina Victory Committee Inc. is a
fundraising representative for several 2002 events with
fundraising participants Dole for Senate Committee Inc. and
North Carolina Republican Executive Committee. For more
information, see the chart on the Committee Organization, p.3.

Financial Activity (p. 3)
e Receipts
Contributions from Individuals

° $ 2,371,384
o Contributions from Political Committees 170,316
co Transfers from Other Party Committees 41,300
co All Other Receipts 426
o Total Receipts $ 2,583,426
« Disbursements
o Operating Expenditures $ 527,356
o Transfers to Affiliates 1,899,468
o All Other Disbursements 76,250
o Total Disbursements $ 2,503,074

Findings and Recommendations (p. 4)

¢ Receipt of Corporate Contributions/Timely Deposit of
Contributions (Finding 1)

e Disclosure of Occupation/Name of Employer (Finding 2)



the missing information for 189 of the 421 errors. In response to the interim audit report,
DNCVC filed amended reports that included most of the information they had obtained.

Legal Standard

A. Required Information for Contributions from Individuals. For each itemized
contribution from an individual, the committee must provide the contributor’s occupation
and the name of his or her employer. 2 U.S.C. §434(b)(3)(A).

B. Best Efforts Ensures Compliance. When the treasurer of a political committee
shows that the committee used best efforts (see below) to obtain, maintain, and submit
the information required by the Act, the committee’s reports and records will be
considered in compliance with the Act. 2 U.S.C. §432(h)(2)(i).

C. Definition of Best Efforts. The treasurer and the committee will be considered to
have used “best efforts” if the committee satisfied all of the following criteria:
e All written solicitations for contributions included:
o Aclear request for the contributor's full name, mailing address, occupation,
and name of employer; and
o The statement that such reporting is required by Federal law.
© Within 30 days after the receipt of the contribution, the treasurer made at least one
effort to obtain the missing information, in either a written request or a
documented oral request.
¢ The treasurer reported any contributor information that, although not initially
provided by the contributor, was obtained in a follow-up communication or was
contained in the committee’s records or in prior reports that the committee filed
during the same two-year election cycle. 11 CFR §104.7(b).

Facts and Analysis

The Audit staff reviewed all contributions from individuals itemized on Schedules A and
determined that DNCVC did not adequately disclose the occupation and/or name of
employer for 421, or 29%, of the contributions from individuals itemized on its
disclosure reports. The 421 items totaled $634,743.

Most of the original written solicitations for contributions were provided by DNCVC
officials and the Audit staff determined that the required information was requested on
these materials. DNCVC was unable to demonstrate that it had made any follow-up
requests for the missing information. Subsequent to the exit conference, DNCVC
obtained the missing occupation and /or name of employer information for 189 of the 421
items. Most of this information was retrieved from the files of DNCVC’s fundraising
partners. At the exit conference, this matter was presented to DNCVC officials who
stated that they would submit corrective amendments.

Interim Audit Report Recommendation and Committee Response
The Audit staff recommended that DNCVC amend its reports to disclose the missing
information. In response to the interim audit report, DNCVC filed amended reports
which included most of the information they had obtained.