The Federal Election Commission (“FEC”) recently answered a common question for those involved in operating a federal PAC:  When is the treasurer personally liable for violations of the rules on recordkeeping and reporting?  In doing so, the FEC highlighted the importance of external oversight of PAC operations, and the value of periodic audits of the PAC that can identify problems before they grow. 

The case involved a non-connected PAC affiliated with the Ute Indian Tribe (“Tribe”).  The Tribe hired a consultant who claimed extensive knowledge of the FEC’s intricate rules.  The Tribe allowed the PAC to operate outside its routine financial controls because the consultant told them the PAC would operate under the FEC’s recordkeeping and reporting system.    

Trouble began immediately, with the FEC’s Reports Analysis Division flagging problems with 75% of the reports the PAC filed in the three years after it began receiving funds in 2016.  As one measure of visible distress, the PAC amended one report five times.  Because no one at the Tribe was overseeing the PAC’s correspondence with the FEC—which were available on the FEC website—the Tribe was unaware of these warning signs.  The volume and magnitude of the filing errors ultimately triggered an FEC audit, which the treasurer also concealed from the Tribe, according to the complaint.

After an investigation, aided by the FEC and PAC audits of the PAC’s financial records, the FEC concluded that the treasurer had recklessly failed to fulfill his statutory duties by engaging in what was described as a pervasive lack of recordkeeping, and failed to use best efforts to obtain, maintain, and submit the relevant financial information to the FEC.  Factual and Legal Analysis at 11.  The conciliation agreement stated the PAC understated receipts by over $248,000, understated disbursements by over $550,000, failed to maintain documents for over $200,000 in contributions and over $93,700 in invoices or receipts, and had almost $95,000 in other reporting violations.  The FEC and the treasurer ultimately entered into a conciliation agreement, in which the treasurer admitted to violating his statutory duty to keep complete records and file accurate reports.  Based on the treasurer’s proof of financial hardship, the FEC agreed to reduce the assessed fine of $33,000 to $3,500. 

The FEC will hold a treasurer personally liable where there is evidence of a “knowing and willful” violation or where a treasurer recklessly fails to fulfill duties imposed by law, or where the treasurer has intentionally deprived himself or herself of operative facts giving rise to the violation.  This is a high bar, and one rarely met if the violations are minor or occasional.  A treasurer can also refute the allegations by showing that they have used “best efforts” as detailed in the FEC’s regulations and guidance to obtain, maintain, and submit information in connection with a committee’s reports and records.

This enforcement action underscores the importance of routine internal controls, including:

• Appropriate internal checks and balances to ensure the PAC’s receipts and disbursements are properly accounted for and disclosed;
• Having multiple people aware of how the PAC is tracking and reporting financial activity to the FEC;
• Having an assistant treasurer who can monitor FEC notices of filing problems; and
• Conducting periodic audits of the PAC’s finances and procedures to ensure compliance.

Sometimes something as simple as checking to see if the PAC’s bank account balance reconciles with the sums the PAC is reporting to the FEC can flag if there are other, deeper issues in the processing of receipts and disbursements.  Covington regularly advises corporations and their PACs in governance and compliance, including by performing external audits and assisting with navigating FEC audits.  The FEC also has a number of helpful guidance documents, including a simple discussion of best practices and a more thorough discussion of internal controls.