Safe harbor for embezzlement misreporting

On March 22, 2007, the Commission approved a policy statement creating a safe harbor for committees that have specified safeguards in place, but nevertheless file incorrect reports due to a misappropriation of committee funds. Under the policy, the Commission will not seek civil penalties in relation to such misreporting.

The policy statement responds to a recent increase in the number of enforcement cases involving misappropriation of committee funds, often by committee employees. Inaccurate reports often accompany misappropriations, leaving committees open to an FEC enforcement action and potential liability for reporting errors, including fines.

The policy statement is not a new legal requirement for political committees; rather, it creates a safe harbor for committees that have the stated internal controls in place at the time of the misappropriation and follow certain post-discovery steps. Committees operating within that safe harbor will not be subject to a monetary fine for filing incorrect reports as a result of the misappropriation. The Commission will also consider it a mitigating factor if a committee uses some, but not all, of the safeguards and a misappropriation occurs. The following minimum internal controls will qualify a committee for the safe harbor:

• All bank accounts are opened using the committee’s name and Employer Identification Number, not in an individual’s name or Social Security Number.
• Bank statements are reviewed for unauthorized transactions and reconciled to the accounting records each month and to reports prior to filing. The reconciliations are done by someone other than a check signer or an individual responsible for handling the committee’s accounting.
• Checks in excess of $1,000 are authorized in writing and/or signed by two individuals. Further, all wire transfers are authorized in writing by two individuals. The individuals who may authorize disbursements or sign checks should be identified in writing in the committee’s internal policies.
• An individual who does not handle the committee’s accounting or have banking authority receives incoming checks and monitors all other incoming receipts. This individual makes a list of all committee receipts and places a restrictive endorsement, such as: “For Deposit Only to the Account of the Payee” on all checks.
• If the committee has a petty cash fund, an imprest system 2 is used, and the value of the petty cash fund should be no more than $500.

Upon discovery of a misappropriation, a committee must notify the FEC and relevant law enforcement and voluntarily file amended reports to correct any errors resulting from the misappropriation. The policy statement is available on the Commission’s website.

1 The Commission has also issued guidance concerning other internal controls that committees may wish to implement.

2 An imprest fund is one in which the sum of the disbursements recorded in the petty cash log since the last replenishment and the remaining cash always equals the stated amount of the fund. When the fund is replenished the amount of the replenishment equals the amounts recorded since the prior replenishment and should bring the cash balance back to the stated amount. Only one person should be in charge of the fund.