A U.S. Court Just Opened a Huge Loophole in Anticorruption Campaign Finance Laws

A New Jersey election law prohibits any “corporation carrying on the business of a bank” from donating to political parties. The New Jersey Bankers Association (NJBA), a trade group representing the interests of 88 banks in the state, challenged that law as unconstitutional. For those who follow disputes over U.S. campaign finance law, one might have expected that this case would be decided within a familiar framework: Under the Supreme Court’s well-established principle that campaign contributions are a constitutionally protected form of political speech, the restriction would only be permitted if it is narrowly tailored to advance the government’s compelling interest in preventing corruption or the appearance of corruption.

The federal appeals court’s surprising decision in this case, though, sidestepped that usual inquiry entirely. Instead, the court determined that the law in question did not apply to the NJBA in the first place. The court reasoned that the law applies only to “corporation[s] carrying on the business of a bank,” and because the banks’ trade association (the NJBA) does not itself make loans and receive deposits, the NJBA is not a “bank,” meaning the law does not prohibit the NJBA (as distinct from its member banks) from making political donations.

That reasoning is at least questionable as a purely linguistic matter. To “carry[] on” a business activity can mean both “to engage in or conduct” business oneself and “to develop [a business] beyond a stage already attained.” While a bank trade association does not do the former, it arguably does do the latter—for example, by lobbying against capital constraints that would impede the loan-making capacity of banks. But more importantly, the court’s narrow, literalist reading of the statute is inappropriate in light of its dangerous consequences for New Jersey’s efforts to restrict corruption and the appearance of corruption in the campaign finance system. The court’s ruling permits (at least for now) New Jersey to restrict banks’ campaign contributions, but allows the representative of those banks to make contributions on their behalf. That’s like saying your child isn’t allowed to reach in the cookie jar, but his friend can grab the cookie for him. This misguided decision has thus created a potentially gaping loophole, one allowing affluent industry groups to engage in campaign-related spending that would ordinarily be deemed to present such a high risk of corruption (or its appearance) that government regulation is justified.

In addition to its literalist parsing of the statutory language, the court offered up some reasons why it might make sense to restrict the campaign donations of banks but not of their trade association. The court’s principal argument was that even if campaign donations by individual banks might pose unacceptably high corruption risks, donations by a bank trade association are unlikely to pose such risks, due to the fact that the association’s member banks have varying interests, which wouldn’t be satisfied be any single quid pro quo that the trade association might seek. But the court offered exactly zero empirical evidence for this dubious claim. In fact, the available evidence cuts in the other direction. There are, alas, plenty of stories involving trade groups engaging in bribery, which perhaps explains why the International Chamber of Commerce publishes guidelines urging business associations to enact anticorruption measures. Moreover, while the court was correct in stating that individual banks sometimes have competing interests, the court seems not to comprehend that trade associations exist precisely because the industry as a whole has common interests too—and the association is a way to help advance those common interests. Sure, the association might be unlikely to pay a bribe (disguised as a campaign contribution) to advance the interests of one bank, but why wouldn’t we reasonably fear that the association might pay such bribes to advance the common interests of the banking sector?  

There is yet another flaw in the court’s reasoning. The court, in commenting on why it might make sense to exempt bank trade associations from campaign finance restrictions, focused only on whether these groups presented an unacceptably high risk of actual corruption. As noted, though, the Supreme Court’s campaign finance jurisprudence permits regulations that prevent either actual corruption or the appearance of corruption. Which is to say that the government has a legitimate interest in creating regulations designed to combat the appearance of corruption, even if they do not prevent actual corruption. The court completely overlooked this standalone appearance-of-corruption interest. Even if the court were correct (which it likely isn’t) when it claimed that the New Jersey legislature probably thought that donations from a bank trade association posed a lower corruption risk than donations from individual banks, this doesn’t mean the legislature didn’t have a legitimate basis to regulate trade associations in order to prevent the appearance of corruption.

New Jersey’s election law is not unique. Massachusetts, for example, has a similarly worded statute. A Kansas law has nearly identical language. These laws are not affected by the recent appeals court decision, which only applies to the states over which that court has jurisdiction (New Jersey, Delaware, and Pennsylvania). We can only hope that other courts will not follow the misguided logic of this recent decision. Doing so would mean creating a loophole for trade associations to circumvent the campaign finance restrictions imposed on its members, and, perhaps worse, would undermine an important legal basis under which governments pursue their anticorruption interests.

7 thoughts on “A U.S. Court Just Opened a Huge Loophole in Anticorruption Campaign Finance Laws

  1. Enlightening post! I wonder if there’re substantive suggestions on how best to legislate moving forward, without creating such glaring loopholes.

  2. Thank you for the fascinating post! I wonder whether this decision will/has been appealed, and what do you think would happen if a case like that reached the Supreme Court? I think the court has been surprisingly tight-lipped about what the “appearance of corruption” means, so I doubt they would take the opportunity to elaborate.

  3. Great piece Logan! I am not very familiar with how trade groups operate but do you think that the corruption risk for trade groups would differ depending on how equally individual member interests are represented? For example, if members who donated larger sums to the trade group were able to exert greater influence on the trade group’s decisions, then the risk of corruption appear much larger than if contributions were standardized across members.

  4. As a native New Jersey resident, I thank you for your wonderful post! I wonder if you think there are potential implications for this ruling being applied beyond the banking industry, to being held to similar “trade associations?” In any case, you absolutely hit the nail on the head that the court’s logic seems dubious at best, and this decisions undoubtedly have negative implications on the fight against corruption. I suppose my question is, how broad can these implications be?

  5. This is a really interesting and timely contribution to discussion, especially in the midst of midterm election season. You mention the lack of empirical evidence in the court’s decision. Curious what your thoughts are on a threshold of empirical evidence that would be convincing in campaign contribution-related cases like this or others?

  6. Thanks for this post – the ruling seems very unfortunate. Do you get that the sense that this was a constitutional avoidance type of decision? Namely, was the court trying to avoid ruling on the actual constitutional issue, or striking down the statute entirely? If so, or if that turned into a trend, I can imagine some pretty significant implications for anticorruption enforcement.

  7. Interesting read! A further observation – at the federal level, national banks as well as trade associations, amongst others, are prohibited from making political donations to any election (federal, state or local) unless the banks, trade associations etc. formed part of a PAC that contributed to a campaign (https://www.fec.gov/help-candidates-and-committees/candidate-taking-receipts/who-can-and-cant-contribute/). I appreciate that this is a state law issue but I also find the court’s rationale peculiar in consideration of the federal position. Do you perhaps know what the rationale was, from a federal perspective, to prohibit trade associations from making political donations as it would be interesting to test this against the reasons advanced by the court. But, I can only speculate that the loophole identified here may have been a factor which informed the federal position.

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