From spotting a thieving treasurer to avoiding FEC penalties, compliance isn't as bland as you might think.
This issue's Shoptalkers: Bradley Crate, founder of Red Curve Solutions; Rachael Rice, founder of Rice Consulting; Ginny Badanes, political director at CMDI; and Erinn Larkin, compliance director at CFO Consulting Group.
C&E: What are the most common compliance mistakes you run into?
Bradley Crate: The biggest mistake we see is that people just flat out don’t do the work they need to do prior to getting a report together — they don’t organize bank statements. Half the battle’s just being organized, and campaigns aren’t good at that on the financial side. That’s always been a challenge. We also see a lot of candidates who have their spouse as the treasurer. Your campaign’s going to fail, and you’re going to end up divorced. Don’t do it. And it shouldn’t be your neighbor, either.
Ginny Badanes: What we see a lot of is that campaigns think the compliance stuff can be dealt with later, but what happens is that if you don’t start with a strong foundation, you end up in a lot of trouble. Then we’re sifting through their bank statements to try and find what these deposits mean; where’s the data that goes with this? And then they end up having to, at a crucial time, turn and focus on something that they wouldn’t have had to if they had just put the things in place to begin with.
Crate: That’s our biggest time suck. It’s not when you start a new client, it’s when you come in and it’s a mess. Nothing matches; they haven’t reconciled anything to a report.
Rachael Rice: It’s like forensic accounting. You have to recreate. One of the mistakes I see that goes hand-in-hand with that is picking people who are almost too close to you. I had a congressional candidate whose girlfriend was the treasurer. She didn’t make a single copy of a check before depositing it, and they came to me 10 days before the report was due and wanted to know why I couldn’t get it done. We always caution people against getting their FFC—friend from church—to be their treasurer. Also, be honest from the outset. Is your treasurer a treasurer-in-name-only, or are they really there to work?
Crate: Our challenge with the treasurer-in-name-only is they want to step in both sides [of the campaign] because they’re usually really close to the candidate. That’s why they have that position. They don’t want to do the work, but they want to understand what’s going on. You can’t cherry-pick what you want to be involved with when you’re a treasurer. You have to be engaged or not engaged.
Badanes: When they find someone who’s a friend of theirs, they’re usually a very competent CPA [certified public accountant], and that’s better than nothing. They just don’t understand the differences between federal accounting practices and what you have to do to prepare an FEC report.
Rice: We’ve had accounts when things aren’t balanced at the end. They want to make an adjustment, which I think is a fairly common practice in accounting, but we can’t really just make adjustments. We can’t adjust away differences.
Badanes: Also, if you have a joint fundraiser and you have control over the funds, that’s where I’ve seen candidates run into trouble. You have to think about all the sources of money. Where we’ve seen people make mistakes with their 48-hour reports is they have their data somewhere else. They have to transfer it, and they don’t notice that $1,000 that was paid online three days ago. They can tell on the post-primary report.
Crate: I think you’d be surprised at how many phantom donations there are out there. Literally a campaign manager or someone just signs up at the last minute for a different processor and decides not to tell anyone. They’re getting money, which is great, but it’s not going anywhere. Then, at the end, they say, “Hey, what about this processor?” And it’s like, “What are you talking about?”
C&E: Why do candidates put that kind of person into such a crucial role?
Badanes: Because they’ll do it for free.
Crate: It’s a lot about people relinquishing control. In a completely crazy campaign, you can’t control what your opponent is going to do. There are so many facets of it you can’t control. But you can control your bank account. So the candidate thinks, “I’m going to focus on my bank account.” But you’re the candidate, you can’t focus on that. You have to focus on trying to control the uncontrollable, so let qualified people do it.
C&E: Does it end up costing them down the line?
Crate: The biggest issue is the liability. The treasurer, unfortunately, is more legally liable than the actual candidate when it comes to these types of activities. So [the candidates] generally want to pick someone they trust. I’ve never seen a candidate get fined or personally go to jail for embezzlement. It’s always the treasurer. The treasurer takes the bullet on all these things. That’s where, being a professional treasure for hire, you want to get all of it organized correctly.
Badanes: Speaking of embezzling, not that you see it often, but along the lines of the mistakes they [non-compliance professionals] make, sometimes [the candidates] trust somebody that they shouldn’t. So even when you trust someone, you should put checks in place. You should have two people sign off on checks. You should have someone looking over bank statements who isn’t in charge of writing checks or making transfers. You need someone else to check that person, even if you trust them. You’re setting them up for temptation when they’re the only person responsible for any of this. That’s where you see these cases of embezzlement. It’s almost always the candidate’s good friend who steals from them.
Rice: We’ve seen that with family members.
Erinn Larkin: A lot of times, it’s the person’s spouse.
C&E: Is it possible they just make a mistake and pay the wrong person?
Crate: Sure. From a treasurer’s perspective, things are moving so rapidly on a campaign. People are telling you to pay this, pay that, and they just want to do well by their friend, so they pay the bill. Then once it’s all wrapped up and they get asked why they paid a certain person, it becomes a problem. It never really happens when you have a professional doing it.
C&E: What about false vendor submissions?
Crate: We end up doing vendor vetting in that respect, because there’s every reason for someone to create a third-party business shell and try to funnel it through there. They submit [an invoice]; things are so chaotic. On the Romney campaign, we caught a couple people who literally tried to just firebomb invoices in only because they thought they’d get paid. This was on the presidential campaign, where there’s so much going on that people try and take advantage of that, but we caught a ton. There was a whole community of people that funded their day trading that way—contribution refunds. They fleeced Sarah Palin and a series of other big names where, say, they made a $50,000 donation. That same day they would go and request a refund, receive a $50,000 check back from the campaign, the credit card would bounce, the $50,000 would then clear, and they’d just walked away with $50,000. We ended up having to sit down and talk with the FBI. There are a lot of these instances.
Badanes: There’s also political fallout if you don’t pay attention. So you may not make such a big mistake that you end up getting fined or the FEC comes after you, but you could make mistakes like not reviewing your occupation or employers of donors. It’s really simple, but if you don’t review it, especially from the online contributions that you’ve had, sometimes it’s a little embarrassing. But sometimes it’s intentionally trying to target you—to make you look dumb.
Crate: We’ve run into incidents like not collecting passports. The Washington Post wrote a nice article about a guy who was a U.S. citizen whose family moved to England when he was young, so he ended up going into the British Royal Army. He has a really entertaining name: Cameron Moore Bacon—C. Moore Bacon. They thought they were onto a really great story about how we were taking illegal contributions. They ended up being completely wrong and having to retract it.
Rice: There’s no penalty for a bad TV ad. There’s no penalty for bad direct mail, bad messaging, or for a crappy stump speech. But if you don’t take care of your accounts, there are real penalties out there. Maryland is really stepping up their enforcement on the state level.
C&E: Has compliance changed because of Citizens United?
Larkin: Citizens United, if anything, instilled fear in candidates to raise even more money.
Crate: I think that it’s changed for the better. The biggest challenge that we see is that Super PACs completely disenfranchise state parties. A big donor realizes they have enough money to do what they want; they don’t care about the mechanism [of party building]. They don’t ever say, “I want to do something really sexy like get out the vote,” which is what a state party’s main function is. They want to throw out bomb ads. That doesn’t really help. It’s a challenge.
Badanes: The biggest impact that’s had on us is having to convince donors that you can’t make corporate contributions to political campaigns. We have people insist that they can now make corporate contributions. We’ve had to talk to many donors explaining why we’re returning their checks to them: “No, you’re not understanding what that ruling meant.” On the campaign, it didn’t impact much.
C&E: What about McCutcheon? Was that a game changer?
Crate: It probably impacted 10 people out of a billion dollars that we raised.
Badanes: Donors can now write large checks.
C&E: Is text-message donating the future? What about crowdsourcing?
Rice: State law doesn’t allow it.
Larkin: For text messaging, the problem was that the phone companies didn’t want to do it. With crowd sourcing, I’m not convinced that it’s legal from an FEC compliance standpoint. It sort of exists in this extralegal universe, because they hold onto funds for so long before turning them over to the campaign. I’ve been waiting for somebody to request an advisory opinion about that.
Crate: I threw a fit about [text message donations]. I was jumping up and down like a two-year-old kid. I think the FEC regulations need to change drastically in order for that work. There’s a certain amount of it that can come in below the rate so it’s essentially unitemized. Let’s say your cellphone is paid for by your employer, and you donate via text. Your employer pays that bill—you just forced the campaign to take an illegal corporate contribution without knowing. We can’t go to Verizon Wireless and figure that out.
C&E: What about services like Square?
Crate: Square is awesome if you’re running a sub shop. If you go and buy a sandwich at the quick mart, they don’t care about your name, your address, or your occupation. You’re a transaction. But we need to know essentially everything. The problem is that they don’t collect that information, and so we end up having to do the chase.
Badanes: If you don’t gather all that information, you won’t be able to match aggregates properly. Finance tends to want to do it fast. The thinking is, “I’m doing an event, so I take a card and swipe it.” But what I keep telling them is that the amount of information you have to gather—either having to type it into the iPad or computer, whatever you’re using—negates the speed, because you’re then adding that entry. We encourage them to use our product on their tablet, so all you’re typing in is credit card information.
Crate: We used swipers at the Republican National Convention, but the lines were out the door because they were swiping in Square. Then Romney for President built a user interface to get all that information. People would swipe and then step to the left and enter all that information.
Rice: I’m always concerned that treasurers are not collecting enough information.
Crate: There are some campaigns that truly don’t care [about compliance]. You have to want it to be in order for it to be right.
C&E: Is there a dearth of enforcement because the FEC and state ethics committees are understaffed?
Crate: The biggest issue in states is the technology. If you think the FEC is lacking, look at the state board of elections. Louisiana has software that is over 40 years old.
Rice: Was there software 40 years ago?
Badanes: I think the FEC is catching things. They’re just catching them a lot later, because they’re so far behind. It sounds like a staffing issue on their end.
Crate: The challenge is that after a campaign ends, it’s just us compliance cockroaches who are left, because everybody sprays. If there’s somebody who has to pick up the pieces, nine times out of 10 they’re not getting compensated for any of it. The account’s dry, but there’s still a mountain of paperwork that needs to be done.
C&E: Why do you feel responsibility if you’re not getting paid?
Crate: It’s my job; it’s probably more than personal. Each cycle I’m treasurer on probably 60 or 70 campaigns. That’s a legal problem for me.
Badanes: If you’re doing the work actively knowing you’re not going to get paid, and you work for a corporation, you could actually be making a corporate in-kind contribution. We still continue to help people out after Election Day; we just plan ahead.
C&E: What happens if there is enforcement?
Crate: Usually if there’s an issue, it gets resolved very quickly because we do it right from the beginning. We maintain a very good relationship with our [FEC] analysts to make sure that everything is working right.
Larkin: State parties can do everything right and still get caught in enforcement.
Crate: We deal with a fair number of state parties and the biggest thing they have is continuity. The political director at a state party is your next campaign manager at X, Y, Z campaign. They leave and everybody says, “Oh my gosh, we have an FEC report or a state report due.” There are a fair number of state parties that are getting audited right now just because of that lack of continuity.
C&E: What can campaigns do to spot a fraudulent treasurer?
Badanes: The FEC has a surprisingly great resource online. If you’re hiring a treasurer, have them go to one of the FEC conferences, because that will benefit you if anything goes wrong. You can say, “But I sent them to this conference. I was doing my best effort.”
Rice: Our summary guide in Maryland is very user friendly. Look at your bank statements. Would you get your own bank statement and not look at it?
Badanes: Have logical checks and balances set up.
Rice: Consider a professional. This is a big time commitment.
C&E: Why aren’t we seeing more technological advances in this area?
Crate: If you look at the whole of our multi-trillion dollar economy, campaigns are two to three billion dollars. It’s a rounding error. What company like a Google or someone who’s really on the forefront of developing is going to develop a technology that’s going to focus on politics and not on the other multi-trillion dollars that are out there?
This article originally appeared in Campaigns and Elections Magazine.