PLI Current Highlights New Wave of FARA Enforcement

By Zachary G. Parks on Posted in Foreign Agents Registration Act

As the Foreign Agents Registration Act continues to receive national attention, an article in this quarter’s PLI Current journal describes the Justice Department’s increased focus on the statute.  The article, authored by Covington’s Rob Kelner, Zack Parks, and Alex Langton, discusses the shifting FARA enforcement landscape, analyzes how the statute works, and addresses pending FARA reform legislation.  As the article notes, because “both the Department of Justice and Congress have signaled a clear intent to strengthen FARA and to clamp down on enforcement,” the time has come to “reevaluate previously accepted axioms regarding FARA.”

Covington has one of the nation’s most experienced and long-standing FARA practices, which includes attorneys in our Election and Political Law and White Collar Defense practice groups.  The firm routinely advises U.S. and international clients on compliance with FARA, obtains advisory opinions from the FARA Unit, represents clients in FARA audits and internal investigations, and defends clients accused of violating FARA.  For questions on FARA enforcement or compliance matters, please reach out to any member of Covington’s Political & Election Law Practice Group.

Survey of the Pay-to-Play Laws of the United States

By Zachary G. Parks and Kevin Glandon on Posted in City Pay-to-Play, Pay-to-Play, SEC Pay-to-Play, State Law, State Pay-to-Play

Companies doing business with state and local governments or operating in regulated industries are subject to a dizzying array of “pay-to-play” rules.  These rules effectively prohibit company executives and employees (and in some cases, their family members) from making certain personal political contributions.  Even inadvertent violations can be dangerous:  a single political contribution can, for example, jeopardize the company’s largest public contract.

To ensure compliance with these rules, some companies have adopted pay-to-play policies that require employees to obtain pre-approval from the legal or compliance department before making certain political contributions.  But it is not always easy to determine whether a particular contribution should be pre-approved.  Analyzing how the rules apply to a contribution and identifying the universe of applicable pay-to-play rules is a daunting challenge.

To help in-house lawyers and compliance professionals with making these decisions, Covington annually updates a detailed survey of the pay-to-play laws of the 50 states and multiple cities and counties.  This over 300-page survey:

  • Details all statewide pay-to-play rules.
  • Describes over one hundred “specialty” pay-to-play rules that apply to contractors doing business with certain agencies or companies operating in certain regulated industries, including those that apply to investment firms that manage state or local public funds, lottery and gaming companies, public utilities, redevelopment contractors, and insurance companies.
  • Lists numerous localities that have adopted their own rules.

The survey also includes user-friendly charts and legal citations answering questions such as:

  • Which donors are affected?
  • Which contributions are restricted? 
  • Is there a de minimis exception? What are the other exceptions?
  • Which types of contracts are covered? 
  • How long after a contribution does the restriction run?
  • Does the rule restrict political fundraising and other solicitations? 
  • Are there reporting and disclosure requirements?
  • What are the penalties?

Covington is pleased to be able to offer the survey for purchase in its entirety.  Alternatively, individual states or groups of states may be made available at discounted rates.  For questions or to purchase the survey, please contact paytoplaysurvey@cov.com.

IRS Announces Major Change To Nonprofit Donor Disclosure Requirements

By Zachary G. Parks, Derek Lawlor and Robert Kelner on Posted in Tax

In a significant and unexpected development, the U.S. Treasury Department announced yesterday that certain nonprofits — including trade associations and 501(c)(4) social welfare organizations — would no longer be required to disclose the names and addresses of their donors on the annual “Form 990” they file with the Internal Revenue Service. Although the IRS already redacts this donor information before making a Form 990 public, these groups will now no longer need to disclose this information to the IRS in the first place. In this advisory, we discuss the background and implications of this development, which is an important one for trade associations, social welfare organizations, and major donors.

Why Did Treasury Make the Change?

In making the change, the Treasury Department emphasized that donor disclosure for organizations other than 501(c)(3) charities and 527 political organizations is not statutorily mandated. Further, in the press release announcing the change, the Treasury Department explained that the previous policy, which required the IRS to redact donor names and addresses, was not a prudent use of taxpayer dollars and that disclosure of donor names and addresses was not necessary because “the IRS makes no systematic use of Schedule B with respect to these organizations in administering the tax code.” In addition, the government emphasized that the “new policy will better protect taxpayers by reducing the risk of inadvertent disclosure or misuse of confidential information,” acknowledging that the IRS “has accidentally released confidential Schedule B information in the past” and that certain tax-exempt groups had previously received “inappropriate” government inquiries “related to donors.”

Which Groups Are Now Exempt From Disclosing Donor Names?

Once the policy becomes effective, “tax-exempt organizations required to file the Form 990 or Form 990-EZ, other than those described in 501(c)(3), will no longer be required to provide names and addresses of contributors on their Forms 990 or Forms 990-EZ and thus will not be required to complete these portions of their Schedules B.” Thus, the new policy exempts 501(c)(4) social welfare organizations, 501(c)(5) labor organizations, 501(c)(6) trade associations, and lesser-known nonprofits such as social clubs, volunteer fire departments, and fraternal benefit societies.

Which Groups Are Not Exempt From the Change?

As noted, 501(c)(3) charities are still required to disclose donor names and addresses on the Schedule B, unless they qualify for a separate exemption, such as the exemption available to churches. Similarly, 527 political organizations that file a Form 990 (such as the Democratic Governors Association and the Republican Governors Association) will still be required to disclose donor names and addresses.

Does This Change What the Public Sees?

No. Even under the current regulations, donor names and addresses on the “Schedule B’s” filed by the now-exempted nonprofits were redacted by the Internal Revenue Service or by the nonprofit before they were made public.

Is Schedule B Gone?

No. Even though many nonprofits will no longer be required to include donor names and addresses on the Schedule B, it appears they still must complete the Schedule B, itemizing the amounts of contributions from donors who give $5,000 or more in a year. But they would no longer be required to include the names and addresses of donors on this schedule.

When Does The Change Become Effective?

The revised reporting requirements apply to returns for taxable years ending on or after December 31, 2018.

Does This Mean That the IRS Will Never Be Able to See 501(c)(4) and 501(c)(6) Donor Information?

No. The new guidance makes clear that the IRS could conceivably still review this information in connection with an audit or enforcement proceeding: “Organizations relieved of the obligation to report contributors’ names and addresses must continue to keep this information in their books and records in order to permit the IRS to efficiently administer the internal revenue laws through examinations of specific taxpayers.”

Does This Mean That These Groups Will Not Be Required to Disclose Their Donors At The State Level?

It depends. There are several states, including New York and California, that require certain 501(c)(4) social welfare organizations to register as charitable organizations with the state and file detailed reports that include unredacted versions of the Form 990 donor list. Once this policy becomes effective, the Form 990s submitted by 501(c)(4) organizations in these states will no longer contain the names and addresses of donors, which represents a significant shift in those states. However, because this policy does not affect 501(c)(3) charities, similar state-level filings by these public charities will go unchanged.

In addition, we have highlighted in previous client advisories and on our Inside Political Law blog how states are increasing their efforts to compel nonprofits to disclose their donors. Whether it is the DISCLOSE Act in Washington or an Executive Order in Montana, states are finding innovative ways to obtain donor information from nonprofits. These targeted state-level efforts should not be affected by this policy change at the IRS. After this policy change, however, we expect that regulators in states that promote donor transparency will use the opportunity to occupy this space and push for new donor disclosure laws or regulations. Covington will continue to monitor the response at the state level.

Covington Publishes Update on Recent FEC Enforcement Activity

By Robert Lenhard and Perrin Cooke on Posted in Campaign Finance

After a surprisingly active 2017, the Federal Election Commission’s enforcement efforts have slowed noticeably in the early months of 2018. In February, former Commission Lee Goodman’s departure from the agency left the Commission with only four members. While the remaining Commissioners can still form a quorum, unanimity is required for all official agency action. Perhaps unsurprisingly, then, the Commission’s enforcement activities have declined during the first half of 2018. Still, while it may be tempting to conclude that the FEC has gone entirely idle, the Commission has pursued a number of recent cases that point to continued areas of enforcement risk. In a newly published client alert, Covington provides an overview of recent FEC enforcement trends and identifies areas of active enforcement at the four-member Commission.

New Tactic Emerges in Fight to Compel Companies to Disclose So-Called “Dark Money” Contributions

By Zachary G. Parks on Posted in Corporate Political Spending Disclosure

A new corporate political disclosure trend is coming. For years, those advocating increased corporate political disclosure have looked for ways to force companies to publicly reveal the names and amounts of corporate contributions to so-called “dark money” 501(c)(4) social welfare nonprofits and 501(c)(6) trade associations. To date, these initiatives have had, at best, limited success.  But this month, by signing an unprecedented Executive Order, Montana Governor Steve Bullock introduced a new tactic in the effort to compel companies to publicly disclose 501(c)(4) and (c)(6) contributions.  This tactic—using state government contracting rules to force broad disclosure of previously non-public corporate political donations—could upend the current corporate political disclosure state of play.  Because these executive orders do not need legislative approval, Montana’s Executive Order may be only the first domino to fall in the coming months.  More detail on the Executive Order and its ramifications are discussed in this Covington advisory.

Colorado Enacts Replacement Campaign Finance Enforcement System

By Andrew Garrahan on Posted in Campaign Finance, Enforcement, Litigation, State Law

Just one week ago, a federal court in Colorado held that the state’s system for enforcing its campaign finance laws was unconstitutional.  Moving quickly, the Colorado Secretary of state has enacted temporary enforcement rules, effective immediately.

Under the new rules, any person may file a complaint, just like under the old system.  However, the rules now include three protections that attempt to prevent abuse of the system for political purposes.

First, before referring a complaint for a hearing, the Secretary of State’s office will now review all complaints to determine whether the complaint actually identifies a violation and whether it alleges sufficient facts to support the alleged violation.

Second, the Secretary of State can now offer the targets of complaints a chance to “cure” minor violations instead of referring the matter for a hearing.

Third, the Secretary of State’s office is now responsible for conducting discovery and prosecuting the complaint, ending the private attorney general system that existed under the old rules (though complainants may still offer amicus curiae briefs and seek judicial review of the administrative hearing).

In a welcome move for current respondents, all pending complaints and hearings not yet decided will be remanded for Secretary of State review.

In addition to these enforcement changes, the new rules also establish a formal system for seeking advisory opinions on campaign finance issues.

There will almost certainly be more changes coming to Colorado campaign finance law– these rules are only temporary, and the legislature will take up a permanent enforcement solution in 2019.  It remains to be seen whether lawmakers take that opportunity to make substantive changes in the law as well.

Colorado Campaign Finance Enforcement System Found Unconstitutional

By Andrew Garrahan on Posted in Campaign Finance, Enforcement, Political Law, State Law

In a case with interesting ramifications, a federal court this week struck down major parts of Colorado’s campaign finance enforcement system as unconstitutional.

The system at issue, which was created through a ballot initiative, generally allowed any person who believed there had been a violation of the state’s campaign finance laws to file a written complaint with the Secretary of State.  The Secretary of State was required to refer the complaint to an administrative law judge within three days, and the judge had to hold a hearing within fifteen days.  There was no mechanism for filtering out bad cases — each and every complaint got a hearing.  In his opinion in Holland v. Williams, Judge Raymond Moore of the U.S. District Court for the District of Colorado held this system was facially unconstitutional as a violation of First Amendment political speech rights.

There are three main takeaways from the decision.  First, although the state’s campaign finance regulatory scheme remains in effect, it is temporarily without an enforcement mechanism.  A new enforcement system should be coming soon. In a release, the Secretary of State’s office stated it is working to adopt temporary enforcement rules quickly, and will seek a more permanent solution in the 2019 legislative session.

Second, any other states and localities that allow citizens to file campaign finance complaints, especially without a screening system, may face similar challenges to their rules.  While the court in this case seemed to indicate that a citizen-driven system could be permissible so long as there was a system for screening complaints, there is no guarantee that other judges will follow every contour of this decision.

Finally, the decision is another example in what is becoming a pattern of courts striking down citizen-initiated campaign finance and government ethics reforms.  In the last few years, voters in Colorado, South Dakota, and Missouri, have all passed reforms that they felt would be stricter than what state legislators were self-imposing, only for a judge to strike some aspect of the reform as unconstitutional.

Bank Loans to Federal Candidates

By Robert Lenhard on Posted in Campaign Finance

FEC audit reports often address obscure topics, but today one touched on an important issue for banks.  At an open meeting, a majority of FEC Commissioners would not support a staff recommendation that a bank violated the campaign finance laws when it made a loan based on collateral that was commercially reasonable under the banking laws, but from a source that was illegal under the election laws.  All Commissioners agreed the campaign and source of the improper collateral could face a fine from the FEC, but so long as the bank operated in a commercially reasonable way to ensure repayment of the loan, it would not face liability.

The FEC staff audited the Kelly for Congress campaign, and found that it had secured a $50,000 bank loan with collateral from a campaign donor.  Under the FEC’s rules, that collateral is considered an excessive contribution by the donor to the campaign.  On this point, all four FEC Commissioners agreed.  But the staff went further, recommending a finding that the bank had also violated the Federal Election Campaign Act of 1971, as amended (FECA), by permitting the loan to be made with collateral that was illegal under the campaign finance laws.  The FEC staff reasoned that this meant the bank loan was not made under terms that “assured repayment.”  Only two of the four Commissioners supported this view.  Chair Hunter and Commissioner Petersen found the regulation that permitted the agency to look at the totality of the circumstances to determine if the loan was made on a basis that assured repayment had been met when the bank followed its normal course in securing adequate collateral for the loan.

This is not the first time the FEC has reached a similar result, although the facts were a bit different here.  See, e.g., MUR 5262.  But its effect is significant, for it means that banks need not be as concerned with the requirements and restrictions of FECA, and can remained focused on traditional banking standards and regulations when considering federal candidate loans.  As with any rule based on a “facts and circumstances” test, banks should not read these decisions as a blank check.  Had the collateral offered here not been from one of the bank’s trusted customers, but a secured interest in a Russian bot farm instead, presumably the FEC would have cast a colder eye on the commercial reasonableness of the transaction.  But these decisions should provide some comfort to banks considering loans to federal candidates, parties and PACs, for it will limit their exposure in many instances.

“Straw Donor” Cases Are In The News Again Today

By Robert Kelner on Posted in Campaign Finance, Enforcement

In a 2014 blog post about the Dinesh D’Souza case, we speculated that it might have been one of the first “straw donor” cases identified based on automated analysis of campaign finance disclosure reports.  It’s not clear that was actually the case, though the Department of Justice did say at the time that “the indictment [of D’Souza] is the result of a routine review by the FBI of campaign filings with the FEC.”  There has since been considerable debate about exactly how routine that review really was.

Straw donor schemes are surprisingly common.  Such schemes involve an individual who has made the maximum donation to a campaign and who seeks to circumvent the contribution limit by funneling money through friends and family, causing FEC reports inaccurately to list those other persons as the true donors.  Depending on the amount of money involved, this can be a criminal misdemeanor or felony offense.  It is often not difficult to ferret out such schemes by closely reviewing or “data mining” disclosure reports filed by the campaigns with the Federal Election Commission.

There is a typical pattern to these cases.  Often the person who initiates the scheme asks close family, friends, employees, or vendors to make contributions to the candidate, and then reimburses them for their contributions.  The employees and vendors might include individuals with modest salaries who nonetheless all make the maximum contribution of $2,700 per election or $5,400 per election cycle (current limits).  On FEC reports, they will all show up as having contributed around the same time, in the same significant amount.  Some may list the same “employer” when they make their contribution, as reported on FEC reports.  They may be associated with a common address.  Some may list occupations that would not be typical for major political donors.  So with a bit of diligence and old fashioned gumshoe detective work, or with the aid of a computer algorithm, it is not rocket science to look for patterns in FEC reports that suggest the identity of the person perpetrating the straw donor scheme.

Given the tens of thousands of federal, state, and local campaigns across the country, there are probably many more such straw donor schemes than you read about in the newspapers.  Only a small number are detected and actually prosecuted.  When they are prosecuted, they often do result in criminal convictions for the perpetrator of the scheme, though often not for the persons who act as conduits for the contributions.  Courts have varied widely in the severity of sentences imposed, sometimes imposing prison sentences, and sometimes not.

Given the public nature of campaign finance disclosure reports, it is a bit of a puzzle why there are not more prosecutions related to straw donor schemes.  One likely explanation is the “glass houses” effect.  While campaigns do aggressive opposition research on one another, and uncovering an opponent’s use of straw donors could provide grist for filing a highly public complaint, there is always the risk that the opponent would take a close look at the complainant’s own campaign donors, which might also include a straw donor or two (or quite a few).  So campaigns tend not to include this in their opposition research arsenal, perhaps to avoid mutually assured destruction.

Meantime, for anyone who is politically active, the main takeaway is that it is illegal to reimburse political contributions made by others, and it is not difficult for a diligent adversary, journalist, or law enforcement agency to pick you out of the haystack and trigger an investigation.

DOJ Announces Planned Release of FARA Advisory Opinions

By Robert Kelner on Posted in Foreign Agents Registration Act

The Department of Justice has begun informing persons who obtained Foreign Agents Registration Act (“FARA”) advisory opinions that it will “soon” publish on its website copies of advisory opinions issued since January 1, 2010.  The opinions apparently will be redacted to remove the identities of the requesters and their clients.  For years, the Department has been criticized for maintaining a body of what amounts to secret law concerning FARA, in the form of unpublished advisory opinions.  This has made compliance with FARA difficult, and has led to confusion among the regulated community concerning the Department’s positions on key interpretive issues.  Publication of close to eight years’ worth of recent advisory opinions could shed substantial light on the Department’s approach to the triggers for FARA registration, exemptions, and perhaps certain reporting issues.  It is not yet clear exactly when the opinions will be posted.  Covington will be tracking this issue closely and will update clients on developments once the advisory opinions are released.

LexBlog