Increased Enforcement Risk for Criminal Campaign Finance Violations

Every four years, prosecutors at the Department of Justice (“DOJ”) train their sights on money spent to influence the outcome of the presidential election—and those who spend it.  While the Federal Election Commission (FEC) has exclusive jurisdiction to penalize and enforce civil violations of the Federal Election Campaign Act (FECA), 52 U.S.C. § 30101 et seq., DOJ is responsible for criminally prosecuting “knowing and willful” FECA violations that rise to a certain monetary threshold.  The Department always “has a strong interest in the prosecution of election-related crimes,” but the massive influx of money that comes with a presidential election creates increased enforcement opportunities—and carries increased risk for companies and individuals to run afoul of FECA and other laws aimed at protecting the integrity of U.S. elections.  Even the most well-meaning company or individual may be caught in the crossfire of an investigation or subpoena.

Several high-profile FECA cases related to the 2016 presidential election cycle suggest that FECA will be at the top of federal prosecutors’ minds this time around.  For example, the guilty plea of President Trump’s former lawyer, Michael Cohen, included two related FECA violations.  Specifically, Cohen admitted to knowingly and willfully violating both 52 U.S.C. § 30116, which limits excessive contributions, for arranging six-figure in-kind donations to the President’s election campaign (well above the $2,700 individual contribution total permitted per election cycle), and § 30118, FECA’s prohibition on corporate contributions made directly to federal campaigns, for facilitating payment of the in-kind donations through a corporation.

In addition to FECA’s limits on excessive and corporate contributions, criminal penalties are available for knowing and willful violations of several other FECA provisions, as recent prosecutions have demonstrated.  The following are likely to be specific enforcement priorities for the Department:

Ban on Contributions and Donations From Foreign Nationals (§ 30121): FECA’s ban on contributions and donations from “foreign nationals” applies to non-citizens who are not lawful permanent residents (i.e., non-citizens who are not green card holders), as well as “foreign principal[s]” as that term is defined in the Foreign Agents Registration Act (FARA), 22 U.S.C. § 611, including foreign governments, foreign political parties, and foreign corporations.  One particularly thorny compliance area is the applicability of this prohibition to domestic U.S. subsidiaries of parent corporations organized under the law of, or with their principal place of business in, a foreign country.  Although the issue is not directly addressed by the statute, the FEC has offered guidance that such domestic subsidiaries do not qualify as “foreign principals” and are therefore not independently subject to FECA’s ban on donations by foreign nationals (keeping in mind that contributions by both foreign and domestic corporations are prohibited at the federal level).  However, a donation by the domestic subsidiary may not be funded by the foreign parent, nor can foreign nationals participate in any way in the donation.  FECA’s ban on political donations by foreign nationals applies with equal force to donations to presidential inaugural committees and any state- and local-level donations.  In fact, this is one of the few areas where the federal government can regulate, and DOJ can prosecute, activity in non-federal elections. ­­

The issue of foreign money in elections has in the last several election cycles been a special focus for the Department.  For example, in 2016 the Department successfully obtained a guilty plea from Bilal Shehu, who admitted to illegally funneling $80,000 of funds from a foreign national into Barack Obama’s 2012 reelection campaign.  DOJ’s interest in the case stemmed from a remarkable series of events: the money that Shehu illegally contributed went toward two $40,000 tickets to a San Francisco fundraiser with then-President Obama.  One of those tickets was used by Edi Rama—now the Prime Minister of Albania—who was denied entry to the fundraiser, yet able to get a photograph with the president.  Rama used his photograph with the president as part of his successful campaign in Albania during the country’s national elections.

Other notable foreign money FECA cases in recent years include DOJ’s ongoing prosecution of Lev Parnas and Igor Fruman for alleged federal and state donations funded by foreign nationals to facilitate licensing of a business venture, and the successful guilty plea DOJ obtained from Imaad Zuberi for funneling foreign funds into hundreds of thousands of dollars of illegal campaign contributions.

“Conduit” Contributions (§ 30122): also known as “reimbursed contributions,” “straw donor” contributions, and contributions in the name of another, these are one of the most common FECA violations.  A conduit contribution entails one individual passing money to a second “conduit” individual, to fund a donation in the conduit’s name to a federal candidate.  Conduit contributions are typically used to hide the identity of the true donor, often for the purpose of evading FECA’s substantive prohibitions, such as the limits on excessive contributions and contributions funded from impermissible sources as prohibited by § 30118 (corporate contributions) and § 30121 (contributions funded by foreign nationals).  Conduit contributions may also be subject to felony prosecution under federal conspiracy and false statement statutes.

A particular area of conduit contribution exposure for corporate clients is donations that are arranged by a corporate official, but made in the names of employees who are then reimbursed from corporate funds.  Such contributions are illegal under FECA, and, if over $10,000 in the aggregate and knowingly and willfully made, prosecutable as felonies under § 30118 and § 30122.  This can potentially lead to substantial monetary penalties and even prison sentences for individuals involved: conduit contributions over $10,000 can lead to up to two years in jail time, and conduit contributions over $25,000 can lead to up to five years in jail time.

Just yesterday, former Kentucky Democratic Party chairman Jerry Lundergan was sentenced to 21 months in prison and fined $150,000 for “orchestrating a multi-year scheme to funnel more than $200,000 in secret, unlawful corporate contributions” from a company he owned into the Senate campaign of his daughter, Alison Lundergan Grimes.  A jury had previously convicted Lundergan of ten felony counts, including one count of making a corporate campaign contribution.  Another example of a recent prosecution is the $1.6 million penalty agreed to in November of 2019 by Dannenbaum Engineering Corporation, which entered into a Deferred Prosecution Agreement with DOJ to resolve $323,000 of illegal conduit contributions made through its employees over a two-year period.

“Coordinated Expenditures” (§ 30116): independent expenditures by individuals and political action committees can become impermissible “coordinated” expenditures if made “in cooperation, consultation, or concert, with, or at the request or suggestion of” a candidate or a candidate’s authorized committee.  Coordinated expenditures are treated as “contributions” for the purposes of FECA and can lead to criminal penalties.  While impermissible “coordination” cases are considered difficult to prosecute, the 2015 case of Virginia political consultant Tyler Harber—sentenced to two years of jail time for exactly this conduct—shows that such prosecutions are not impossible.  In a case hailed as “the first criminal prosecution in the United States based upon the coordination of campaign contributions between political committees,” Harber pleaded guilty to violating FECA for making and directing $325,000 of expenditures as part of a PAC he created and operated to benefit a candidate for Congress, while simultaneously serving as the campaign manager for that candidate.  Harber admitted to “participating in the purchase of specific advertising” by the PAC in order to benefit the candidate, while knowing that such coordination was unlawful.  Even though the circumstances of Harber’s coordination that led to prosecution in this case were particularly egregious, given the increased use of independent expenditures it is possible that prosecutors will use the Harber case as a model for more aggressively pursuing other coordination cases in the future.

“Scam PACs”: a developing area of criminal campaign finance enforcement is “Scam PACs,” or “political committees that collect political contributions, frequently using the name of a candidate, but which spend little to none of the proceeds on political activity benefitting that candidate.”  Because there is no clear rule setting out how much money a PAC must spend on advancing political causes versus compensating the PAC managers, criminal Scam PAC cases can be difficult to pursue under FECA.  Nonetheless, DOJ first successfully prosecuted a Scam PAC case in November of 2018 as a wire fraud conspiracy, and there have been several more prosecutions since then.  In January of 2020, for example, a Maryland political consultant was sentenced to three years in prison for operating “Conservative StrikeForce” PAC, through which he solicited donor funds for conservative candidates and causes, but then spent the donations on himself.  And in July of 2019, a former candidate for Congress pleaded guilty to operating “fraudulent and unregistered political action committees” through which he collected over $1 million, which he spent on “purely personal expenses.”  The defendant in that case admitted to knowingly and willfully violating FECA’s PAC disclosure requirements, in addition to one count of wire fraud.

Individuals and corporate entities moving to increase their political contributions and expenditures over the next four months—whether through corporate PACs, individual donations by employees, or otherwise—must be mindful of the FECA provisions above and the potentially serious criminal penalties for violations.  Even those that are not themselves the target of law enforcement may be swept into a costly investigation that could have been avoided through effective compliance, using discretion when determining which organizations and individuals to transact with, and consulting outside counsel when questions arise.

The Supreme Court’s Mazars Decision Contains a Significant Suggestion That Congress May Be Bound by the Attorney-Client Privilege in Congressional Investigations

Understandably, much of the commentary following the release of the Supreme Court’s blockbuster decision in Trump v. Mazars USA, LLP has focused on the impact of the Court’s ruling on the long-running quest for the President’s tax returns and other financial records.  Buried in the Court’s opinion, however, is an easily overlooked aside regarding the attorney-client privilege that could have significant implications for private parties responding to requests from congressional investigators.

As our colleagues have explored in greater detail elsewhere, congressional investigators have long averred that they are not bound by judge-made common law privileges, including the attorney-client privilege and attorney work product doctrine.  Congress’s steadfast refusal to recognize privilege notwithstanding, serious privilege disputes between Congress and private parties are relatively rare, and the question of Congress’s ability to compel production of privileged material has remained largely unsettled by the courts.  Capitalizing on this uncertainty in the law, congressional investigators frequently rely on the implied or stated threat of a subpoena for privileged material as leverage to obtain sought-after non-privileged documents or testimony.

In Mazars, however, the Supreme Court may have dramatically weakened that leverage and tilted the scale in favor of parties resisting congressional demands for privileged material.  In effect, Mazars represents the Court’s effort to balance Congress’s investigatory prerogatives with countervailing separation-of-powers and related private interests.  In this vein, in discussing the limitations on Congress’s inherent investigative authority, Chief Justice Roberts’s opinion for the Court notes that recipients of congressional subpoenas “have long been understood to retain common law and constitutional privileges with respect to certain materials, such as attorney-client communications.”

In support, the Court points to an account of a famous privilege dispute arising out of the Senate Whitewater investigation.  There, congressional investigators issued a subpoena for notes from a meeting between the Clintons, White House lawyers, and the Clintons’ private counsel.  After a months-long standoff, the Clintons and Congress ultimately reached an agreement under which the Clintons would produce the requested documents in exchange for a concession from the Senate Whitewater Committee that such disclosure would not constitute waiver of attorney-client privilege.  Although the parties thus avoided a direct dispute on privilege, the Mazars Court cited this episode as evidence of a common understanding that parties responding to a congressional investigation have a right to withhold privileged material.

Of course, the question of the applicability of the attorney-client privilege to congressional investigations was not squarely before the Court in Mazars, and the Court’s brief aside on this subject may be easily cast as dicta.  Nonetheless, the Court’s approving recognition of the view that the privilege does apply to Congress will surely prove helpful to parties fighting efforts by congressional investigators to compel disclosure of privileged material.

D.C. Circuit Rules Obstruction of Office of Congressional Ethics Not a Crime, but Questions and Risks Remain

In a unanimous ruling, the D.C. Circuit shed new light this week on the applicability of key federal criminal statutes on proceedings before the Office of Congressional Ethics (“OCE”).  While largely removing the prospect of criminal obstruction liability for parties responding to inquiries from OCE, the court’s opinion is another reminder of the potentially serious collateral consequences inherent in any congressional investigation.

The case, United States v. Bowser, arose out of an OCE investigation of a senior aide to former Congressman Paul Broun.  OCE is an independent, non-partisan entity that was established by a House Resolution in 2008.  While OCE is tasked with investigating alleged violations of any “law, rule, regulation, or other standard of conduct” committed by a “Member, officer, or employee of the House,” its powers are limited.  For example, OCE cannot issue subpoenas or compel cooperation with its investigations.  Participating in an OCE investigation in voluntary—though, the OCE often threatens to embarrass witnesses by declaring them to be uncooperative in public documents and drawing an “adverse inference” from any unwillingness to cooperate.  Further, OCE is not authorized to formally determine whether such a violation occurred or otherwise take action to sanction Members or staff under investigation.  Rather, OCE is intended to serve as a fact-finding body, with the Office ultimately responsible for determining whether there is “substantial reason” to believe that a violation has occurred and, upon making such a determination, referring matters to the House Ethics Committee for further review.

In Bowser, the former aide was accused of using official funds to hire an outside consultant to assist his boss in preparing for debates and other campaign appearances.  The ensuing OCE investigation ultimately led to an Ethics Committee probe and, as relevant here, the federal prosecution of the aide.  Importantly, the aide was charged with not only violating the prohibition on the use of official funds for political activity, but also multiple crimes stemming from his efforts to thwart OCE’s initial investigation.  In particular, after voluntarily complying with a request for documents, the aide signed two documents certifying that he had complied fully with the request and acknowledging that this certification was subject to the False Statements Act.

Following a trial, the aide was convicted of obstructing Congress, as well as concealing material facts from and making false statements to OCE during the course of its investigation.  After the district court granted the aide’s request to dismiss the obstruction charge, the aide appealed his remaining convictions on the grounds that the federal statutes under which he was charged did not apply to his interactions with OCE.

In upholding some—but not all—of the aide’s convictions, the D.C. Circuit drew an important distinction between the federal obstruction-of-Congress statute codified at 18 U.S.C. § 1505 and the more familiar False Statements Act set out at 18 U.S.C. § 1001.  Specifically, the Court noted that the obstruction statute criminalizes only the obstruction of an “inquiry or investigation [that] is being had by either House, or any committee of either House or any joint committee of the Congress.”  By contrast, the False Statements Act applies to “any investigation or review, conducted pursuant to the authority of any committee, subcommittee, commission or office of the Congress.”  Reasoning that OCE was merely an office of Congress—and not a committee of Congress—the court concluded that the obstruction statute does not apply to investigations conducted by OCE.  The court thus affirmed the dismissal of the obstruction charge.  At the same time, however, the court upheld the aide’s false-statements convictions on the grounds that he had fair notice of the applicability of § 1001 to his certification that his response was complete.

Although Bowser largely alleviates the risk of an obstruction charge for parties investigated by OCE, the court’s decision leaves some questions unresolved.  Most notably, the court left open the possibility that a “legislative office might work so closely with the House or a [House] committee that the investigation” could be covered by the obstruction statute.  Further, because the court’s decision focused on the application of the obstruction statute to OCE, the court did not directly address whether prosecutors may bring an obstruction charge in connection with an inquiry from an individual Member or group of Members.  These open questions notwithstanding, the decision is a stark reminder of the potential risks associated with any congressional investigation.

DOJ Charges Abramoff in First-Ever Criminal Lobbying Disclosure Act Prosecution

Nearly a decade after his release from prison, having served nearly four years on corruption charges, disgraced lobbyist Jack Abramoff may be heading back behind bars, this time as the first person ever charged and convicted for criminal violations of the Lobbying Disclosure Act (“LDA”).  Yesterday the Justice Department announced that notorious lobbyist Jack Abramoff will plead guilty in what is believed to be the first ever criminal prosecution for failure to register under the LDA.

Although the LDA provides for criminal penalties for any person who “knowingly and corruptly fails to comply with any provision of [the Act],” 2 U.S.C. § 1606(b), until now DOJ had never identified an instance of failure to register that was so “knowing and corrupt” as to rise to the level of a criminal violation.  Indeed, even the LDA’s civil penalty—providing for civil penalties up to $200,000 for “knowingly” failing to either (1) remedy a defective filing within 60 days of receiving notice from the Clerk of the House and the Secretary of the Senate, or (2) otherwise comply with the Act—is rarely invoked.

Abramoff’s charges stem from an FBI sting operation in which an undercover agent posing as a business person seeking to fund lobbying efforts agreed to retain Abramoff for lobbying activities including lobbying contacts.  After being retained, and later contacting a member of Congress on behalf of his new client, the Information alleges that Abramoff failed to register.

The LDA requires “a lobbyist” to register with the Clerk of the House and the Secretary of the Senate within 45 days of the earlier of the date of their first lobbying contact, or the date on which the lobbyist was “retained to make a lobbying contact.”  2 U.S.C. § 1603(a).  A “lobbyist” is an individual who is employed or retained by a client for compensation for “services that include more than one lobbying contact,” and engages in “lobbying activities” for 20% or more of the time spent on services for that client over a 3 month period.  Id. § 1602(10).

A “lobbying contact” is any communication with a covered official—including all members of Congress and their staff—regarding legislation, nominations, rules, regulations, Executive Orders, or any other “program, policy, or position of the United States Government.”  Id. § 1602(8)(A).  “Lobbying activities” includes both “lobbying contacts, and efforts in support of such contacts, including preparation and planning activities, research and other background work that is intended, at the time it is performed, for use in contacts, and coordination with the lobbying activities of others.”  Id. § 1602(7).

To be fair to prosecutors, these rules can be so complex that a “knowing and corrupt” violation is difficult to commit.  Many businesses (and their lawyers) routinely scrutinize whether their employees or consultants have triggered LDA registration by making “more than one lobbying contact” and engaging in “lobbying activities” for 20% or more of their time.

The charging documents in this case seem unconcerned with the definitions of “lobbying contact” and “lobbying activities,” instead focusing on Abramoff’s blatant obligation to register once retained to undertake these functions.  While the rules are complicated and arcane to many businesses and lobbyists, prosecutors in this case were clearly convinced that Abramoff, of all people, should know better: the information charging him for violating the Act specifically points out that Abramoff “was aware of the obligations to register as a lobbyist in part because Congress amended provisions of the Lobbying Disclosure Act in 2007 in part as a reaction to Abramoff’s past conduct as a lobbyist.”

Open for Business: The FEC’s Public Meeting on Thursday, June 18

Tomorrow, the FEC will hold its first open meeting since last August, now that Commissioner James Trainor III has been sworn in.  The agenda will consist of four reasonably routine matters, consisting of three advisory opinion requests and a request for comments on whether the Commission should begin a rulemaking.

As of this morning, all of the advisory opinion requests had only one draft, which often indicates at least preliminary consensus among the Commissioners as to the outcome.  Because only four of the six Commission seats are filled, and all items on the agenda require the affirmative vote of four commissioners, unanimity is required to approve each agenda item.  This will be an early public window into how Commissioner Trainor will approach his role on a Commission that has often seen contentious exchanges among the Commissioners and more than the traditional level of deadlocked votes on important questions of law. This agenda should be tailor made to avoid such conflict.

Can a PAC that serves as a conduit for earmarked contributions take a percentage fee, and if so, how is that reported?  FEC AO 2019-15 (NORPAC).  Like its more famous predecessors, Act Blue and WinRed, NORPAC would like to solicit, process, and forward earmarked contributions to candidate committees.  To pay the credit and debit card vendors, and cover its administrative and solicitation costs, NORPAC would like to deduct and retain a percentage of the contributed amount, (the “Convenience Fee”).  In addition to routine overhead, the fee would help pay staff costs associated with organizing and attending fundraising events for candidates, and to collect and distribute contributions received at these events.

The draft opinion permits NORPAC to do all that it asks, noting that the Convenience Fee would constitute a contribution to NORPAC (which like Act Blue and WinRed, is registered with the FEC as a non-connected committee) from the original contributor, and the entire amount given would count against the candidate-recipient’s limits, even though a portion had been deducted by NORPAC.  The FEC also provides explicit guidance as to how NORPAC should report these transactions.

Can a PAC’s name include a candidate’s initials?  FEC AO 2019-16 (Philip Shemanski).  Mr. Shemanski wants to start a PAC that encourages citizens to vote against Donald Trump.  To help achieve this end, he would like to use the letters “DT” in the PAC’s name, such as “The Defeat DT Campaign” or “The Campaign Committee Against DT’s Re-election.”  Because there is a statute that prohibits a political committee that is not a candidate’s authorized committee from including a candidate’s name in its name, he asks if the use of initials is permitted.  The draft opinion concludes that Mr. Shemanski’s proposal is permissible, because the initials are an abbreviation, rather than a full first or last name or nickname, and are not commonly used to refer to President Trump. The FEC staff is also comforted that at least two other federal officeholders up for re-election this year share those initials.

Some may recall that last year a district court enjoined the Commission from enforcing its regulation that implements a similar aspect of this restriction.  Pursuing America’s Greatness v. FEC, 363 F. Supp. 3d 94 (D.D.C. 2019).  The draft opinion takes the position that the court’s decision did not address the validity of the statute, just the regulation that implemented it, and did not enjoin the agency from enforcing the statute.

Is commercial political speech for the purpose of influencing a federal election?  FEC AO 2019-18 (IDF International Technologies, Inc.).  IDF, a for-profit corporation, operates an online political discussion forum on various topics, including a political discussion forum.  IDF does not communicate with or take a public position on any political party, candidate, or issue, though the users of its forum do.  IDF sells advertising on the forum to generate revenue, and buys online advertising from companies such as Google, in the form of banner ads, pay-per-click ads, and display ads, to help draw traffic to its site.  To attract customers, IDF would like those ads to discuss candidates.  Examples it gives are: “Do You Hate [Candidate]? Read it before it’s taken down. This is what they aren’t telling you.” IDF tracks click-through rates, and will use the names of those candidates that generate the most traffic to its site in these ads.  IDF states the ads will not espouse a public position on any candidate or political party or contain express advocacy.

The draft opinion concludes that IDF is engaged in purely commercial activity and not activity for the purpose of influencing a federal election.  As a consequence, it escapes the FEC’s regulatory clutches, and need not comply with the agency’s restrictions on the source and amount of revenue, disclosure or disclaimers.

Should the FEC open rulemaking on a candidate campaign committee’s transfers to a party committee? Citizens United and Citizens United Foundation petitioned the FEC to begin rulemaking to amend 11 CFR 113.2(c) so that federal candidates can no longer make unlimited transfers of funds to party committees.  Instead, candidates would share the same limit as individuals, which is now $35,500 to a national party’s general account.  Note: additional contributions up to $106,500 can be made to party committees sub accounts, which, depending on the party committee, may pay for convention, legal and building expenses.  The existing rule caught notice when the Bloomberg campaign gave $18 million to the Democratic National Committee’s general account at the end of its presidential run.  The FEC’s sole decision here is whether to open the question to public comment.

Political Campaigns Among Entities Alleged to Have Violated TCPA

Yesterday, a complaint was filed in a Minnesota federal district court against Bernie 2020 Inc. (“the Sanders Campaign”), alleging that the Sanders Campaign transmitted automated text messages to mobile telephone numbers without the “prior express consent” of their recipients in violation of the Telephone Consumer Protection Act (“TCPA”).

The complaint alleges that at least two individuals who had not previously consented to receive text messages from the Sanders Campaign received automated messages encouraging them to click a link to view a campaign advertisement on YouTube.  The complaint states that automated text messages sent by or on behalf of political campaigns are not exempt from TCPA requirements, and it cites FCC guidance to this effect.  The complaint argues that class action certification is appropriate and seeks statutory damages of up to $1500 per unlawful message.

The complaint follows on the heels of a Memorandum Opinion and Order issued by another Minnesota federal district court on June 8, 2020, denying a motion to dismiss filed by Donald J. Trump for President, Inc. (“the Trump Campaign”) in a lawsuit alleging that the Trump Campaign transmitted unsolicited automated text messages to mobile telephone numbers in violation of the TCPA.  The allegations in that case were that the Trump Campaign sent text messages inviting recipients to attend a political rally and to click on a link for tickets or take some other action.

In the Memorandum Opinion and Order, the court found that the plaintiffs had sufficiently alleged an injury in fact, that a plausible connection existed between the Trump Campaign and the unlawful text messages, and that the TCPA violations as alleged were sufficient to survive the Trump Campaign’s motion to dismiss.  The Trump Campaign sought to compel arbitration vis-à-vis one of the plaintiffs on the grounds that he consented to receive text messages and to arbitrate any dispute, but the court denied this contention on the grounds that the Trump Campaign failed to carry its burden, noting the possibility that the plaintiff’s name and mobile telephone number could have been entered into the Trump Campaign’s database without his authorization and leaving these issues for discovery.

Washington Becomes Latest State to Pass Law Prohibiting Foreign Involvement in Campaign Finance Activity

Effective tomorrow, June 11, 2020, a new law in Washington state prohibits involvement of “foreign nationals” in state campaign finance activity.  The law also requires corporations and other entities to certify their compliance with the new law whenever they make a contribution in the state.  This new law reinforces Washington’s reputation as one of the most aggressive state regulators of campaign finance activity.  Federal law already prohibits foreign involvement in U.S. campaign finance activity at the federal, state, and local level.  Nonetheless, we have noticed a proliferation of these state-level laws on foreign campaign finance activity, likely a response to allegations of foreign interference in elections since 2016.

The new Washington law generally prohibits foreign nationals from participating in state campaign finance activity.  “Foreign national” here means a foreign government; a foreign political party; a partnership, association, corporation, organization, or other group or combination of people that is organized under the laws of or has its principal place of business in a foreign country; or an individual who is neither a U.S. citizen nor lawful permanent resident (“green card” holder).

The law prohibits foreign nationals from making contributions, expenditures, political advertisements, or electioneering communications in Washington elections.  The law also prohibits others from making contributions, expenditures, political advertisements, or electioneering communications if the activity is financed in any part by a foreign national or there was foreign national involvement in making decisions about the activity.

Corporations, partnerships, associations, PACs, or other organization or entities making contributions must certify to the recipient that the contributor is not a foreign national, that its contribution is not financed in any part by a foreign national, and that foreign nationals were not involved in making decisions regarding the contribution.  The state has provided a sample certification on its website.

Persons making independent expenditures or electioneering communications in the state, or sponsoring political advertisements in the state, also must confirm that the expenditure, communication, or ad is not financed in any part by foreign nationals and that foreign nationals were not involved in decisions about the expenditures, communication, or ad in any way.  This is true regardless of whether the person is a political committee or some other type of spender.

Campaigns and political committees active in the state, including out-of-state committees, must confirm they have received the required certifications from non-individual contributors.

Per state guidance, these rules do not automatically prohibit activity by domestic affiliates of foreign entities, or by corporations with foreign shareholders or owners.  They must, however, have a source of revenue other than funding from the foreign national, and must abide the rules on foreign nationals participating in decision making.  Organizations with foreign members, such as trade associations, may participate in state campaign finance activity so long as foreign funds are properly segregated from domestic funds and foreign nationals do not otherwise participate in the activity.

DOJ Releases FARA Determination Letters

The Department of Justice’s FARA Unit has publicly posted, for the first time, a set of FARA determination letters.  A determination letter is the Unit’s formal opinion on whether an entity under scrutiny by the Department is required to register under FARA.  As far as we can tell, the release was done quietly, without public announcement.  At some point over the past couple of days, a new page appeared on the FARA Unit’s website containing more than a dozen determination letters.  According to the new webpage, the Unit released determination letters “from 2017 to the present that resulted in an entity or individual registering under FARA.”

The posted determination letters have several notable attributes:

  • The letters are largely unredacted. The names of the parties and the related foreign principals are disclosed in the posted letters, as are the details of the activities and the Unit’s comments on the activities.  Presumably, the Department concluded that it could release the full letters because the recipients eventually registered for the activities discussed in the letters.  (There are nonetheless some relatively small redactions in some letters.)
  • The lack of redactions in these letters is very useful for understanding the Unit’s analysis. In contrast, when the Unit releases advisory opinions, as it began doing two years ago, it redacts identifying details.  Although the released advisory opinions are useful, practitioners have often found that the redactions make it harder discern the underlying legal principles that the Unit applies in the advisory opinions.
  • As noted above, the new webpage includes only determination letters that resulted in a FARA registration. The Department also sometimes issues negative determination letters advising that an entity does not have an obligation to register.  Negative determination letters raise different privacy concerns than the letters released this week, which we expect the Unit would consider carefully before releasing any negative determination letters.
  • The posting of these determination letters appears connected with a set of letters that the Unit released in 2019 in response to a law firm’s FOIA request. For example, some of the letters posted this week contain the same FOIA redactions as the set made available earlier to the law firm.  Notably, however, the set released this week contains additional determination letters, including some more recent letters, suggesting that the Unit intends to continue releasing new letters regardless of any particular FOIA request.
  • In general, the determination letters are more detailed and provide more legal analysis than advisory opinions. The continuing release of determination letters therefore has the potential to be useful to companies and individuals seeking to comply with FARA, along with the lawyers advising them.

Over the past few years, the FARA Unit has made several new efforts to increase transparency regarding its enforcement of the statue.  These efforts include publicly discussing its enforcement priorities, releasing redacted advisory opinions, increasing consistency in filings through a new electronic filing system, and now releasing determination letters.  These are welcome developments, and we encourage the Unit to continue to promote additional transparency in FARA enforcement.

Reporting Donors’ Names to IRS No Longer Required for Certain Nonprofits Per Final Treasury Regulations

Certain tax-exempt organizations are no longer required to report to the IRS the names and addresses of donors on IRS Form 990, Schedule B, according to final regulations published on May 28, 2020.  Noncharitable organizations, such as 501(c)(4) social welfare organizations and 501(c)(6) trade associations, may report only the amounts received from each substantial contributor on Schedule B.  An organization must keep the donors’ names and addresses in its records and make them available to the IRS in the event of an examination.

Only 501(c)(3) charitable organizations and 527 political organizations will still have to report names and addresses of substantial contributors during a taxable year.  Private foundations and 527 organizations must continue to make Schedule B available to the public, without redaction.

The final regulations largely mirror proposed regulations that were issued in September 2019 following litigation we described in a prior post that invalidated the IRS’s previous attempt to issue these rules through Revenue Procedure 2018-38.

According to the preamble, the IRS does not need the names and addresses of substantial contributors in order to administer the Internal Revenue Code.  Addressing numerous commenters who expressed concern about the change in policy, the IRS claimed that it can obtain sufficient information from other elements of the Form 990 to evaluate possible private benefit or inurement. Additionally, due to the IRS’s duty to protect confidential information, removing the requirement to report names and addresses will reduce the risk of inadvertent disclosure.  Finally, in response to the concern that the new rules would lead to an increased flow of money into U.S. elections by making it difficult to detect foreign spending, the IRS explained that it is not authorized to enforce campaign finance laws, and that Schedule B reflects enforcement purely with respect to the Internal Revenue Code.

The final regulations are effective May 28, 2020 but may be applied to returns filed after September 6, 2019.

DOJ Begins to Move Existing FARA Registrants to a New E-File System

Following the Department of Justice’s announcement in March 2019 of an initiative to increase enforcement of the Foreign Agents Registration Act (“FARA”), the Department began rolling out a new electronic filing system for FARA registrations in September 2019. At that time, as Covington reported, the new system applied only to new registrants, and the Department indicated that it would transition all filers to the new system over time. It now appears that the Department has begun to move some existing registrants to the new system.

Recently, Covington noticed that some existing registrants are being directed to a new e-file system when logging into the Department’s website. This new system provides online forms for various filings, including supplemental statements, exhibits, amendments, short forms, informational materials, and more. Similar to the manner in which the Department replaced the old PDF form for the initial registration with the online system in September 2019, the Department has now replaced the remaining PDF forms with this new online system for some registrants.

It is not exactly clear which registrants have been moved to the new system. We have found that some existing registrants continue to be directed to the old system. That system, which has been in place for more than a decade, provides a process for uploading PDF forms and attachments created by the registrant. As best we can tell, registrants that completed an initial registration under the new system – i.e., those that registered for the first time after last September – were the first to be moved to this new system for the rest of the FARA forms.

The new system has a few notable additions. As noted in our prior alert, the Department is requiring that filers submit a scan of a “wet” signature on a DOJ template for filings submitted through the new system.  The system also has a new “Review and Validate Incomplete Tasks” function for registrants to review pending tasks regarding amendments or supplemental statements, and a more streamlined process for providing updated information about officers and directors of the registrant. There does not appear to be a method for submitting a cover letter to a filing. The prior system permitted the inclusion of a cover letter, which registrants often used to provide ancillary or explanatory information to the Department.

Covington will continue to monitor developments to the e-file system and post updates regarding this new system as they become available.