How the Corporate Transparency Act Can Shine Light on Dark Money in U.S. Elections

Last year, in an effort to prevent the abuse of anonymous companies by malign actors, the U.S. Congress passed the Corporate Transparency Act (CTA). The CTA requires certain legal entities, like corporations and limited liability companies (LLCs), to provide information about their beneficial owners—that is, the people who actually own or control the entity—in order to make it more difficult to operate anonymous shell companies for criminal purposes. Pursuant to the CTA, beneficial ownership information must be submitted to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and maintained in a centralized database.

Much of the fight for beneficial ownership transparency was spearheaded by anticorruption advocates, who emphasized the ways in which foreign kleptocrats and other corrupt officials use anonymous companies to hide their stolen wealth. But the CTA’s beneficial ownership transparency measures will be helpful in fighting another kind of corruption, one closer to home: the corrupting influence that so-called dark money—spending by undisclosed donors to influence election outcomes—has on the integrity of U.S. elections and American political sovereignty.

Under U.S. campaign finance law, donations to candidates or campaigns are subject to caps. But there is a way around this: So-called “Super PACs”—political action committees that act independently from candidates—can raise unlimited contributions. Super PACs are legally required to publicly disclose their contributors, but the possibility of forming an anonymous company makes it easy to sidestep this disclosure requirement: A Super PAC can simply list shell companies as contributors, and the real sources of the money can funnel their donations through the shell companies, thus keeping their identities hidden—not only from the American public, but from the Federal Election Commission (FEC), the U.S. government agency with principal responsibility for enforcing campaign finance law. And this, in turn, enables unlawful political spending to go undetected.

In particular, the ability to use anonymous companies to mask the true sources of political spending makes it easier to evade prohibitions on political donations by foreign sources and government contractors. And while U.S. campaign finance law prohibits straw donations—where donors cover up the true sources of their funding by routing their donations through another person or entity—the use of intermediaries to mask donation sources makes circumvention of this prohibition too hard to detect. These loopholes in U.S. campaign finance law enable entities who are not supposed to try to influence U.S. politics through election spending to evade these legal restrictions.

As an example of how anonymous companies get around the prohibition on foreign actors making election-related contributions or expenditures, consider the case of Jose Susumo Azano Matsura, a wealthy Mexican businessman interested in building a waterfront development in San Diego. Before the 2012 mayoral primary in San Diego, Azano created a Super PAC in support of one of the candidates and funneled substantial contributions to that Super PAC through various shell companies that Azano controlled. This is but one example—there are several other documented cases of foreign nationals illegally funneling money into U.S. elections through anonymous contributions to super PACs (see here, here, and here). And while Azano and some others were caught and convicted, there are likely far more cases that go undetected.

The same basic technique—funneling unlawful contributions through anonymous companies—has been used by domestic actors that are subject to special prohibitions on political donations, such as government contractors. These prohibitions, which bar contractors from making contributions to Super PACs as well as to candidates, are designed to prevent “pay to play” corruption, in which contractors are awarded contracts in exchange for political donations. But contractors can mask their political donations using anonymous shell companies. For example, according to a government indictment issued in February 2022, three former executives of a Hawaii-based defense contractor company created a shell company—Society of Young Women Scientists and Engineers LLC—and used this company to funnel a $150,000 contribution from the defense contractor’s funds to a Super PAC supporting Republican Senator Susan Collins of Maine, who had previously helped the company secure an $8 million contract from the U.S. Navy.

The CTA’s beneficial ownership disclosure requirements will make it easier to detect and deter these forms of unlawful political spending. To illustrate, consider a government contractor who wants to donate to a candidate with the hope—or perhaps the promise—that the candidate will use her influence to help the company win future contracts. Under the pre-CTA law, the contractor who wants to evade the prohibition on political contributions could form an anonymous LLC a few months before the election, transfer funds from the contractor to the LLC through some form of sham transaction, and then arrange for the LLC, which the contractor or its officers secretly controls, to make a substantial donation to a Super PAC. The Super PAC will list the LLC on its FEC public disclosure forms. It would not be impossible, pre-CTA, to uncover the illegal campaign donation, but it would be hard: Even if the FEC itself, or a civil society watchdog organization, raises sufficient red flags to prompt an investigation, the FEC would have to expend substantial time and resources to connect the political contribution back to the government contractor. But once the CTA is in effect, the LLC would have to disclose its beneficial owners when it is formed, which would be make it much easier to trace the real source of the LLC’s political expenditures. While of course a firm or individual bent on making illegal campaign contributions could submit false information regarding the LLC’s true owners, this is risky, as violating the CTA’s reporting requirements can result in heavy fines and prison terms up to two years.

The CTA will not create full transparency. For one thing, in contrast to beneficial ownership registries in many other countries, FinCEN’s database will not be public. But FinCEN may disclose beneficial ownership information to government agencies for legitimate law enforcement functions, and although FinCEN has not yet issued its regulations concerning access to the database, it is likely that the FEC and state election regulators will be able to access the beneficial ownership records, upon request, for purposes of enforcing campaign finance law.

Perhaps a more important limitation is that the CTA’s beneficial ownership disclosure requirements do not apply to nonprofits, meaning that many kinds of “dark money” donors, as well as the Super PACs themselves, fall outside the Act’s scope. But that does not mean the CTA will make no difference. Even though would-be illegal donors could funnel their donations through a sham nonprofit rather than an LLC, LLCs are much easier to form and provide a layer of opacity in ways that nonprofits do not. For example, nonprofits must file paperwork with the IRS, which can take up to a year and a half, and they must make their tax returns available to the public every year—requirements that may prevent wholesale substitution of nonprofits for LLCs by entities that would like to mask their unlawful campaign contributions.

Addressing the problem of dark money in U.S. politics may ultimately require more ambitious initiatives, such as requiring LLCs or other corporations to publicly disclose their beneficial owners if they spend money in elections. But such wide-ranging disclosure requirements would require new legislation, and so far there are not enough votes in Congress for that sort of reform. Nevertheless, the CTA promises to help strengthen the enforcement of existing campaign finance regulations, thereby upholding a democracy free from corruption.

2 thoughts on “How the Corporate Transparency Act Can Shine Light on Dark Money in U.S. Elections

  1. Thank you Devon for your wonderful piece! I’m curious about why the CTA’s beneficial ownership disclosure requirement does not apply to non-profits. Is a product of the Financial Services and Banking, Housing, and Urban Affairs Committees assessing that non-profits are not traditionally the culprits of anonymous company abuse? Do you think this exemption is a grave oversight, and that non-profits should be covered? You write that there are structural obstacles for nonprofits that could prevent abuses, but if entities like Super PACS are beyond the act’s scope, shouldn’t the CTA be more inclusive in this regard?

  2. Wonderful post Devon! There are clearly a number of challenges in trying to control “dark money” in political contributions that overlap with different regulatory regimes. I was wondering if actors could evade becoming a “beneficial owner” requiring disclosure by simply contributing funds with no directive authority (on paper at least)?

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