Proposed FEC Misappropriation Policy

Internal Controls Being Encouraged by the FEC

The Federal Election Commission (FEC) is taking steps to encourage political committees, including political action committees (PACs), to implement internal controls to prevent the misappropriation of funds. This action is being taken in response to several recent high profile embezzlement cases, including one which resulted in Lockheed Martin paying a $27,000 fine for failing to take proper precautions related to its PAC.

On October 18, 2006, the FEC commissioners voted unanimously to release for public comment a proposed enforcement policy that outlines minimum safeguards for committees. The FEC also proposed several steps that should be taken after the discovery of embezzlement. If these procedures are followed, the FEC will not fine political committees for filing incorrect reports resulting from misappropriation.

These recommendations should be viewed as the minimum a committee should consider. In its proposal to the FEC commissioners, the FEC Audit Division indicated that larger committees, including corporate and labor union PACs, should view these suggested internal controls as the floor, not the ceiling in FEC compliance.

This policy is only a proposal at this time. Although it is likely that the final policy will closely resemble this proposed policy, the FEC is currently accepting public comments and may ultimately approve revisions. All comments are due by November 30, 2006.

Internal Controls to Prevent Misappropriation

The FEC proposes that all political committees adopt the following internal controls:

• bank accounts must be in the name of the committee, not an individual
• outgoing checks in excess of $1,000 and all wire transfers must be signed or authorized by two individuals designated in the committee’s internal policies
• incoming checks must be received by an individual who does not also handle the committee’s accounting or banking functions; this individual must keep a list of all committee receipts and place a restrictive endorsement (e.g., “For Deposit Only”) and the account number on all checks
• bank statements must be reconciled with accounting records and the list of receipts each month by someone other than an authorized check-signer or the individual handling the committee’s accounting
• petty cash must be handled using an “imprest” system with no more than $200 outstanding at any time

Post-Discovery Actions

After discovering the misappropriation of funds, committees must:

• notify relevant law enforcement
• notify the FEC
• voluntarily file amended reports with the FEC to correct any reporting errors 

Recommendations

Although this policy is not yet final, nothing prevents a committee from proactively taking action. Accordingly, prior to FEC final approval of the new enforcement policy, all committees should:

• review current practices to determine compliance with the proposed policy
• review bylaws to determine compliance with the proposed policy
• consider implementing necessary changes prior to final approval of the policy
• notify relevant personnel of any new procedures 

After FEC approval of the new enforcement policy, all committees should:

• review the final FEC policy
• implement any changes necessary to ensure compliance
• provide relevant personnel with compliance training on new procedures 

Aside from this new FEC guidance, other steps committees can take to minimize the risk of misappropriation include:

• purchasing accounting and FEC filing software
• regularly reviewing and updating committee bylaws
• providing periodic compliance training to relevant personnel
• having all FEC filings and committee documents reviewed by counsel
• performing an audit at least once every two-year election cycle
• outsourcing some or all committee functions to an outside entity

Conclusion

Federal law requires all political committees to file accurate and complete disclosure statements with the FEC. In order to ensure compliance with this requirement, all committees should implement the proposed system of internal controls outlined above. This will improve the accuracy of reporting and reduce the possibility of misappropriation. However, no system of internal controls guarantees compliance, so those involved with committees must be vigilant. Additionally, any politically active corporation or other business entity should not limit its system of internal controls to federal PAC activity. Illegal fundraising activity by employees, improper corporate contributions at the state or local level and inaccurate state PAC reports can also result in fines, criminal prosecutions and negative publicity. Accordingly, businesses should institute comprehensive internal controls that incorporate all relevant political activities.