What happens when a donor sets up a corporation and uses it to contribute to a Super PAC, intending to hide his or her identity by having the corporation make the contribution? What about when a nonprofit social welfare organization, commonly called a 501(c)(4) organization, appears to spend millions on political ads but then reports much less about its political activities on its tax documents? Which agency investigates these practices for possible violations of federal law? 

These were the questions posed at an April 9 Senate hearing, chaired by Senator Sheldon Whitehouse of Rhode Island. The answers, for now, appear to be that there are little to no consequences on the federal level, and no agency willing to take the lead on enforcement. But, if a recent Utah law is any indication, states are beginning to fill this void and make the first moves toward addressing these issues through new donor disclosure requirements.

Senator Whitehouse’s Concerns

The Senate hearing, held by the Judiciary’s Subcommittee on Crime and Terrorism, included testimony from Mythili Raman, Acting Assistant Attorney General, Criminal Division at the Department of Justice (“DOJ”) and Patricia Haynes, Deputy Chief of the Internal Revenue Service (“IRS”) Criminal Investigation Division. Senator Whitehouse called attention to two specific practices that he thought should lead to more criminal enforcement actions by the DOJ and IRS:

1) misreporting of political activity by 501(c)(4) organizations; and

2) the use of shell corporations set up specifically to make contributions to Super PACs and hide a donor’s identity. 

Senator Whitehouse said that these practices make “a mockery” of campaign finance and tax law and that the lack of any enforcement action is “a serious matter” for the federal government. 

DOJ & IRS Testimony

DOJ and IRS officials declined to comment publicly on any ongoing investigations or potential enforcement matters. DOJ did defend its lack of action in pursuing campaign finance or tax code violations, mostly by placing the blame on other agencies and Congress. Ms. Raman said that it would be “exceedingly difficult” to prosecute donors or Super PACs for illegal coordination since the Federal Election Commission (“FEC”) has failed to lay out a “common sense” approach to defining coordination in its guidance, regulations, and its own civil enforcement matters.  In addition, DOJ has trouble identifying bribes or excessive contributions made using 501(c)(4) organizations because donors are only disclosed on tax forms, which may be filed a year or more after an election. While Ms. Raman said DOJ continues to remain “vigilant” about the use of corporations and nonprofit organizations as a way to hide a donor’s identity and serve as an “end-run around contribution limits,” she suggested that greater clarity in campaign finance law and greater disclosure generally would help DOJ to do more.

Enter the States?

With uncertain enforcement prospects at the federal level and with no clear agency taking the lead, some states have chosen to take action targeting more politically active 501(c)(4) organizations and corporations through new donor disclosure requirements. The most recent is Utah, which earlier this month passed a law requiring disclosure of donor names by for-profit and nonprofit corporations that make political expenditures. 

Utah already requires corporations to report their political expenditures once they total at least $750 in a calendar year. The new law will add another reporting step: any entity that reaches the $750 threshold will now have to disclose the names and addresses of its donors. The new law defines a “donor” as any person who gives money or anything else of value to a corporation without “receiving full and adequate consideration” in return. This would appear to exempt a for-profit business operating in the ordinary course and (one would think) dues payments to trade associations, even if a portion is used for political expenditures. But on these points the law is unclear. The only way for donors to avoid the disclosure of their names is to sign a statement specifically requiring that the donation not be used for political expenditures.   

The Utah law goes into effect in May 2013, and it may signal the start of a broader movement across the states. With growing media scrutiny about political spending by nonprofit organizations and no indication that Congress or any federal agency will make a move any time soon, the states appear to be leading the way to more detailed disclosure requirements.