Medford, New Jersey recently disqualified five would-be city contractors from receiving municipal contracts until 2017 for allegedly making political contributions in violation of the Township’s pay-to-play ordinance.
The ordinance, adopted in 2012, imposes an automatic four-year bar on contracting with a company that contributes to candidates or committees in excess of the law’s per-recipient or aggregate contribution limits. The ordinance also contains an unusual restriction barring subcontractors if the subcontractor would be prohibited from being awarded the primary contract.
Medford’s action serves as a harsh reminder that companies must remain vigilant regarding changes in pay-to-play laws, even at the local level.
A coalition of 60 investors, led by the AFSCME Employees Pension Plan and Walden Asset Management, recently announced that they have submitted shareholder proposals seeking additional disclosures regarding political spending and lobbying activities. This announcement reflects a continuing desire among these groups to obtain additional disclosures from public companies regarding lobbying and political spending, and in particular participation in trade associations and social welfare organizations.
Last season, many of these same investors submitted a number of political spending and lobbying shareholder proposals to public companies, which led to political spending shareholder proposals being the number one shareholder proposal topic in 2013. Ironically these proposals led all shareholder proposals numerically, but they did not fare as well as many other popular shareholder proposals, including proposals regarding executive compensation and a variety of corporate governance measures. We believe some of this may be attributable to the fact that a great many companies, including many of the companies that were the subject of such proposals, already publicly disclose significant information about their political spending activities on their websites.
You can find more information regarding the announcement, including the companies that are the subject of the campaign, by clicking here.
Earlier today, IRS Commissioner John Koskinen, in his first appearance before the House Appropriations subcommittee on Financial Services and General Government Oversight, stated that final regulations governing political activity by 501(c)(4) social welfare organizations are unlikely to be completed before the November elections.
His statement seems to differ from the White House Statement of Administration Policy that was published last night. In that statement, the Administration “strongly opposes” proposed legislation temporarily prohibiting the IRS from finalizing the proposed regulations for one year (i.e., until after the elections). That legislation, H.R. 3865, was passed by the House late this afternoon. The Statement concludes by stating that if the President were presented with H.R. 3865, his senior advisors would recommend that he veto the bill.
The difference may reflect the Commissioner’s initial view that it will be all but impossible to reconcile the many and diverse comments, largely negative, that have been submitted to the IRS commenting on the proposed regulations prior to the November elections.
At the same time, some critics of the proposed new rules feel that the Administration is keen on implementing them before the November elections. Their view is likely to be strengthened by the Administration’s Statement.
Connecticut’s campaign finance regulator, the State Elections Enforcement Commission (“SEEC”) recently released an important advisory opinion that made clear that a state contractor that is otherwise barred from giving to a state political party under Connecticut’s pay-to-play law can give to the party’s federal account, a point SEEC staff had previously addressed. However, the state party must use those funds to influence federal elections, consistent with a method of separating federal and state campaign expenses laid out by the SEEC in that opinion.
The SEEC’s opinion should help settle a controversy over the prevalence of state party fundraising that included businesses that may otherwise be barred from giving to a state party under the pay-to-play law.
Notwithstanding the opinion, investigation will likely continue of allegations that solicitations for contributions to a state party’s federal account were requested specifically to support state candidates (in this case, the Governor). Such a practice might be referred to as “earmarking.” Earmarking—or designating that a contribution should be put to a particular use—often has ramifications in campaign finance law, whether at the state or federal level.
The investigation highlights an important point for donors restricted by Connecticut’s pay-to-play laws: In evaluating compliance, regulators are looking at the identity of the group receiving the contribution and the context of solicitations and contributions.
On January 30, 2014, the UK Parliament adopted the “Transparency of Lobbying, Non-Party Campaigning and Trade Union Administration Act 2014.” Covington today issued a client advisory explaining the new law, which imposes mandatory registration and disclosure requirements on certain organizations that lobby in the UK. Significantly, however, unlike in the United States, the new UK law does not require registration by corporations whose main business is not lobbying, even if these corporations undertake limited lobbying activities. Generally, the United States has much more rigorous lobbying disclosure rules than do most other countries. The new UK law, which is fairly narrow in scope, reflects a trend of somewhat greater attention to lobbying disclosure overseas, however. There have been proposals for the EU to adopt a similar mandatory lobbyist registry for lobbying in Brussels. We will continue to track these global lobbying compliance developments for clients.
At the federal level, it is generally illegal for an outside group like a Super PAC or a 501(c)(4) organization to coordinate its independent expenditures with the candidate it supports. The same is true in many states. As we recently reported in our 2013 FEC Year in Review, however, the FEC did not act on any allegations of illegal coordinated activities in 2013.
The picture in some states, though, is much different. The Montana Commissioner of Political Practices has brought complaints against at least nine state candidates for coordinating with an outside money group, even suggesting that one of the officials should be removed from office. In Wisconsin, the Milwaukee County District Attorney is leading a “John Doe” probe into illegal coordination in that state’s 2011 and 2012 recall elections. The California Fair Political Practices Commission settled a coordination case against a candidate for the first time in November. Just this week, Arizona’s Attorney General was called to testify in an administrative hearing into whether his campaign coordinated with an outside group in the 2010 campaign. Not only are the states actively pursuing coordination enforcement cases, but state regulators are willing to take political and legal risks to do so. The Montana and Wisconsin investigations, for example, are highly controversial, and the targets in both states have sued the regulators.
This will likely be the enforcement environment for some time to come. Turnover of two Commissioners at the FEC in late 2013 shows no sign of leading to a change in how outside groups are treated there. In the states, meanwhile, investigations are ongoing and legislatures nationwide are considering new campaign finance reforms targeting outside money. In this environment, candidates and outside spenders alike should understand that the inaction at the FEC is not mirrored at the state level.
California’s Fair Political Practices Commission (FPPC) is more aggressive than ever and is employing new tactics. The FPPC’s recently-released end-of-year report detailing enforcement activities in 2013 highlights some interesting statistics that should be on the radar of every company doing business in California.
Prosecutions of both “serious campaign cases” and lobbying violations were both “at their highest level ever” last year, while prosecutions of conflicts of interest “continued at record high levels.” In just one “proactive” investigation of gift-giving by three major companies to public officials, the FPPC found 205 violations resulting in “86 successful prosecutions to date.” In total, last year, the FPPC closed 854 cases “with proven violations,” of which 257 resulted in prosecutions and 597 resulted in warning letters. To contrast these figures with those of 2012, the number of cases closed with proven violations is up 20% (854 from 712), the number of cases resulting in prosecutions is up 44% (257 from 178), and the number of cases resulting in warning letters is up 12% (597 from 534).
The FPPC emphasized its focus on “aggressively compelling compliance” before elections are held. To further this goal, the 27-staff-member Enforcement Division has established programs to “proactively pursue” campaign money laundering and conflicts of interest (both listed as top enforcement priorities), as well as donor disclosure on state ballot measures, and those who should have—but did not—file campaign reports.
At Covington’s biannual political activity and government affairs compliance conference, we noted that campaign finance regulators and watchdogs appear to be increasingly using “big data” as method of detecting violations through identification of patterns in contributions. The FPPC is becoming more sophisticated in its approach as well, adapting “new investigative techniques,” including “more complex analytical audits.” The FPPC has also stepped up interagency collaboration, working with city and county clerks as well as law enforcement agencies.
Among the investigations highlighted by the FPPC, a few are worth special attention.
- “Dark money” litigation. In a widely-covered case, the FPPC litigated over disclosure of the “true source” of multimillion dollar contributions by Americans for Responsible Leadership (ARL) to California state committees. The FPPC noted that, after taking the case up to the California State Supreme Court, ARL “admitted to acting as an intermediary for the true source of the contribution.” The investigation, which also involved the California Department of Justice, led to a record settlement of $1,000,000. Donor disclosure continues to be a hotly-contested issue across the country.
- Ballot measure ad donor disclosure. The FPPC compelled a committee established to support Proposition 37 (related to genetically engineered food) to “make disclosure of the committee’s largest donors more conspicuous.” The FPPC also investigated a failure to disclose the donor of a $100,000 contribution to a ballot measure committee active in Sacramento, ultimately identifying a Seattle-based hedge fund manager as the source.
- “Shadow lobbying.” The FPPC fined a public policy consulting firm and its principals for seeking to influence legislative or administrative action without registering as lobbyists. As we noted at Covington’s recent conference, there is likely to be an uptick in investigation (at the federal level and in some states) of those who qualify as a lobbyist but who have not registered.
- “Money laundering” or conduit contributions. The FPPC fined a developer for providing funds to a business associate so the associate could make political contributions. The associate then asked others to make contributions that would be reimbursed. Reimbursed contributions represent a significant compliance risk for individuals and businesses. This type of activity is comparatively easy to prosecute and, at the federal level, is one of the most common sources of criminal campaign finance convictions.
- Widespread pre-election audit pilot program. Following a request by San Bernardino County and subsequent legislative action, the FPPC has agreed to a pilot program to work with the county “for the first time in a State or local election” to perform pre-election audits of “all competitive campaign committees.” We will be watching to see whether this pilot program indicates that broad-based auditing of campaign finance reports is practicable.
- Investigation of money laundering through a party committee. An FPPC audit by the Enforcement Division led to an allegation that a state senator laundered money to his brother’s Assembly campaign through the Stanislaus County Republican Central Committee. An administrative law judge has recommended fines of $40,000. As enforcement agencies increase their use of “big data” analysis of contribution patterns, we expect to see increased investigation based on the flow of money through political committees.
California’s FPPC is one of the most aggressive political law and campaign finance regulators in the country. However, the FPPC’s trends appear to correspond with broader trends we see across the nation, as media reports of contributors using sophisticated campaign finance techniques lead to the use of increasingly sophisticated investigative tools and analytics by regulators and watchdog groups.
Covington & Burling LLP today released new data showing that the Department of Justice has maintained an increased level of Foreign Agents Registration Act audits,and settled into a consistent pattern of conducting 15 audits of FARA registrants each fiscal year.
In each of the last four years, the Department of Justice’s FARA office has conducted 15 audits of FARA registrants, we reported at Covington’s Corporate Political Activity & Government Affairs Compliance Conference held in Washington today. The new data are based on information that Covington obtained from our work with the Department of Justice’s FARA office.
FARA audits have increased precipitously in the last few years. The Department conducted no audits in 2004 through 2007, but then 13 in 2008, 14 in 2009, and 15 from 2010 through 2013. The new data reported today supplement information obtained by the Project on Government Oversight in 2011 under a Freedom of Information Act request.
The number of FARA registrants fluctuates with time, but there are usually around 400 active FARA registrants. With 15 audits conducted each year, each FARA registrant faces about a 4% chance of an audit each year.
In conjunction with the Corporate Political Activity and Government Affairs Compliance Conference, which Covington is hosting today in Washington, D.C., the firm’s Election and Political Law Practice Group has issued its 2013 FEC Year in Review. This is the second year in a row that we have undertaken a systematic study of the major developments at the FEC over the preceding year. Attendees at the conference, who have gathered in Washington from across the country, will hear a live presentation on campaign finance law developments.
The recent indictment of conservative commentator Dinesh D’Souza is, in many ways, an unremarkable example of a garden variety “straw donor” prosecution. The Department of Justice cranks out a steady stream of them. Even the relatively small dollar amount at issue ($20,000) is not especially unusual. DOJ is aggressive in prosecuting even small reimbursement cases.
What did catch our eye, however, is the way in which the government apparently became aware of the alleged reimbursement scheme. For some time, we have been telling clients that either the FEC, DOJ, or both, would eventually figure out how easy it is to detect straw donor schemes by looking closely at patterns in publicly filed FEC disclosure reports. With just a little bit of digging, including some analysis of geographic, employer, and timing data (ideally mapped against other publicly available data about particular donors), your average fourth grader these days could devise an algorithm to tease out reimbursement schemes from the data.
Sure enough, in the press release that accompanied its indictment of Mr. D’Souza, DOJ touted the fact that “the indictment is the result of a routine review by the FBI of campaign filings with the FEC.” While we do not yet know the details, we suspect this could be evidence that the FBI is beginning to use data analytic techniques to study FEC reports for patterns. Of course, it is also possible that the agents did this the old fashioned way, by eyeballing the reports and looking for visibly obvious patterns, or by following up on a tip. Some supporters of Mr. D’Souza have more nefarious theories of what led the FBI to focus on him. We shall see.
We wrote not long ago here in Inside Political Law about the use by the Moreland Commission in New York of data analytics to identify patterns in campaign disclosure reports. It’s clear that the era of Big Data has arrived for campaign finance law. Expect to see regulators across the country starting to use simple data analytic techniques to ferret out campaign finance violations from public disclosure reports. Journalists are likely to do the same. Soon enough, there will be an app for that.