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.

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Guest Post: C4I’s New Index Illuminates the Need for Reform of State-Level Campaign Finance Rules in the U.S.

Today’s guest post comes from Shruti Shah, President and CEO of the Coalition for Integrity (C41), together with Laurie Sherman, C4I’s Policy Advisor, and Stephanie Camhi, a C4I external consultant.

Anticorruption and good governance advocates, in the United States and elsewhere, have long been concerned with the potentially corrupting influence of campaign donations and other political spending on public policy. (Indeed, although the U.S. Supreme Court has deemed political spending to be a form of “speech” protected by the First Amendment of the U.S. Constitution, the Court has also recognized the prevention of corruption, or its appearance, as one of the few interests sufficiently compelling to justify campaign finance laws that limit such spending.) Much of the discussion of the campaign finance issue in the United States focuses on federal elections, yet concerns about the corrupting effect of campaign donations are just as important in state-level elections. State elected officials—legislators, governors, and other elected executive branch officials—play a vital role in creating and implementing public policy, and these officials decide how to spend trillions of dollars on roads, health, education, welfare, and other programs. And money continues to flow into state races in record-breaking amounts. Yet the potential for corruption—both illegal corruption and the “softer” corruption associated with undue access and influence for large donors—does not receive as much attention at the state level as at the federal level.

State-level political candidates must follow campaign finance laws written and enforced by the state, and states vary greatly in terms of the content and quality of their campaign finance systems. To highlight the variance across states in campaign finance laws, and to provide more information to voters and reformers, the Coalition for Integrity (C4I) created the first State Campaign Finance Index analyzing the campaign finance laws and regulations in all fifty states and District of Columbia. The Index assigns states scores based on several factors that, in C4I’s judgment, constitute best practices. The most important factors are as follows: Continue reading

The U.S. Supreme Court Has an Appearance Problem: What FEC v. Cruz Got Wrong

According to the U.S. Supreme Court, campaign contributions are a form of political “speech” and are therefore protected by the First Amendment of the U.S. Constitution. As a result, the government may restrict such contributions only if doing so serves a compelling state interest. Currently, the only interests that the Court has recognized as sufficiently compelling to justify restrictions on political spending are preventing corruption or the appearance of corruption.

Though sometimes presented as a single interest, the prevention of actual corruption and the prevention of the appearance of corruption are not the same. The reason the government has an interest in preventing actual corruption is obvious. The Court has explained the related but distinct interest in preventing the appearance of corruption by appealing to the importance of maintaining public confidence in the electoral process. If a certain campaign finance activity creates the appearance of corruption, then ordinary citizens may start to view their political participation as futile, and may lose faith in the integrity of elections. Because Congress has an interest in preventing this erosion of public trust, the government can regulate campaign finance activities that the public perceives as corrupt, even when those activities are not associated with actual corruption.

At least that’s what the Court has said. In practice, however, the Court has often failed to apply the appearance of corruption standard in a way that serves these objectives. This is nowhere clearer than in the Court’s recent decision in Federal Election Commission (FEC) v. Cruz. The case concerned a federal law that prohibited a candidate from using post-election campaign donations to repay more than $250,000 of personal loans that the candidate made to his or her campaign prior to the election. The government justified this law partly on the grounds that it prevented the appearance of corruption. After all, when a candidate uses donations to repay personal loans, the donor’s contributions go straight into the candidate’s pockets; the public could easily view such payments as fostering corruption. In support of this argument, the government pointed to a public opinion poll in which 81% of respondents thought it was “likely” or “very likely” that donors who make post-election contributions expect a “political favor” in return. Additionally, the government cited an academic study that found—on the basis of over three decades of empirical evidence—that politicians with campaign debts are “significantly more likely” than debt-free politicians to switch their votes after receiving contributions from special interests.

This evidence, on its face, would seem to support the government’s claim that the limit on using post-election donations to repay a candidate’s large personal loans furthers its compelling interest in preventing the appearance of corruption. However, the Court’s majority opinion dismissed the government’s appearance-based argument in a brief passage with relatively little sustained analysis, apparently treating the flaws in the government’s arguments as self-evident. The Court’s dismissive attitude to the government’s evidence in this case indicates a worrisome approach to the appearance-of-corruption issue more generally.

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How the U.S. Supreme Court Might Undermine Longstanding Safeguards Against Pay-to-Play Corruption

A campaign finance case currently pending before the U.S. Supreme Court, Federal Election Commission (FEC) vs. Cruz, could have serious implications for corruption in the United States. The essential facts of the case are these: Just a day before Senator Ted Cruz’s narrow victory in the 2018 Senate election, Cruz personally lent $260,000 to his campaign. Under federal campaign finance law, contributions to a candidate’s campaign that come in after the election has already occurred can be used to repay up to $250,000 in personal loans a candidate has made to their own campaigns, but no more. Therefore, Cruz’s campaign reimbursed him only $250,000, not the full $260,000. Cruz challenged the cap on reimbursing a candidate’s personal loans from post-campaign donations as an unconstitutional limit on political speech in violation of the First Amendment of the U.S. Constitution.

If Cruz wins—and he very well might—the result could be a substantial increase in bribery of U.S. elected officials. As many commentators have noted (see here, here and here), allowing a victorious candidate to have their loans repaid by private interests is a recipe for quid pro quo corruption. After all, this money goes into an elected official’s pocket, and the fact that the contributions are made after an election increases the likelihood that a post-election donor knows that the recipient will be in a position to do him official favors. But the risks that this case poses to anticorruption law go beyond the particular activity at issue in the case itself. There is a very real risk that the Supreme Court will use this case to further limit the sorts of interests that can justify campaign finance restrictions of any sort, thereby jeopardizing seemingly well-established and recognized limitations on political spending that have long been justified on the grounds that they prevent corruption and its appearance.

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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.

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The Corruption of Italian Democracy: Russian Influence Over Italy’s League

Italy’s largest far-right policy, La Lega (“the League”), has long had close ties with Putin’s regime in Russia. The League’s leader, Matteo Salvini, has been a vocal supporter of Putin for years (see also here, here, and here), and in 2017 the League signed a formal cooperation agreement with Putin’s United Russia party. Even before then, the League (then known as Lega Nord, the “Northern League”) often advocated within Italy and the EU for Russian interests. Notably, while the EU imposed sanctions on Russia after Russia’s illegal annexation of Crimea in 2014, the League opposed sanctions and tried (unsuccessfully) to upend the solidarity necessary to keep EU sanction in place. That opposition to sanctions only intensified after the 2017 cooperation agreement: At a 2018 conference in Moscow, Salvini—then Italy’s Interior Minister–insisted that Italy would work “day and night” to repeal the 2014 sanctions. Salvini’s efforts proved unsuccessful, as he was unable to convince his coalition partners to change Italy’s stance. But the Kremlin still benefitted from the League’s vocal opposition to sanctions, as it showed that Russia wasn’t isolated diplomatically and that the West is internally divided.

The League’s long history of cooperation with Moscow could be chalked up to shared ideology and policy goals. But it appears that corruption, not policy, might explain why the party is so close with Putin.

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“Elect a Government That Works”: A Case Study in Populism and Corruption from India 

As the United States was reeling from President Richard Nixon’s resignation following the Watergate scandal, another imperiled leader—Indian Prime Minister Indira Gandhi—was fighting for her political life thousands of miles away. Although Gandhi and Nixon never got along, their stories overlap. Both barely squeaked into power after close elections in the late 1960s, but then won resounding reelection victories in the early 1970s. Gandhi’s political fortunes, like Nixon’s, took a turn for the worse shortly after reelection, in light of substantiated accusations of illegal campaign activity. But at this point, Nixon and Gandhi’s stories diverge. Unlike Nixon, Gandhi stayed the course and refused to resign. And in the end she prevailed: Gandhi was popularly elected three times with some of the largest governing majorities in Indian history.

How did Gandhi convince the public to reelect her, despite her known, widespread abuses of authority? How did a leader ensnared in scandal and corruption hold onto power to become one of the most beloved leaders in the world’s largest democracy? The answer to these questions may lie in Gandhi’s concentrated emphasis on left-wing populism. She argued to voters that she alone was most capable of effectuating change for India and its most needy citizens by enacting social programs and redistributing wealth. Additionally, Gandhi spent much of her time as Prime Minister consolidating her power within the party and the central government. This enabled much of the corruption that marked her rule but was also what allowed her to argue to the public that she was uniquely capable of fixing the nation’s problems.

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Unholy Alliance: How and Why India’s Politicians Protect India’s Corrupt Godmen

In my last post, I explained how loopholes in India’s legal system have enabled self-proclaimed “godmen” to amass fortunes by facilitating money laundering. But these corrupt godmen could not build their illicit empires without protection from politicians. After all, the government could crack down on godmen’s activities by changing the laws, or even by ensuring adequate enforcement of the flawed laws that currently exist. The government has not done so in part because of a corrupt relationship between godmen and politicians. The politicians provide the godmen with political favors, special privileges (including sweetheart deals for the godmen’s business ventures), patronage appointments, and, perhaps most importantly, the preservation of the system of legal loopholes and minimal oversight that enables the godmen to amass their fortunes. In return, godmen provide politicians with a number of services. These services include the same money laundering services that godmen provide to businessmen. But the godmen also provide politicians with three other services in exchange for the politicians’ complicity.

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New Podcast, Featuring Samuel Power

A new episode of KickBack: The Global Anticorruption Podcast is now available. In this week’s episode, my collaborator Christopher Starke interviews Samuel Power, a Lecturer in Corruption Analysis at the University of Sussex, about his research on the relationship between political party financing and corruption. The conversation focuses on his comparative research on political funding in Denmark and the United Kingdom, as well as several related topics, including the corruption risks associated with social media  and also touches on his more recent work on social media advertising by political parties.

You can find links to this episode on various platforms here. You can also find both this episode and an archive of prior episodes at the following locations:

KickBack is a collaborative effort between GAB and the ICRN. If you like it, please subscribe/follow, and tell all your friends! And if you have suggestions for voices you’d like to hear on the podcast, just send me a message and let me know.

Do Stronger Campaign Finance Disclosure Rules Reduce Corruption? A Critical Assessment of Transparency International’s CPI Report

Transparency International (TI) released its latest Corruption Perceptions Index (CPI) last month. A couple weeks back, in what has unfortunately become a necessary annual tradition, I posted a warning that one should not attach significance to short-term changes in any individual country’s CPI score. Today, I want to turn to another matter. In recent years, whenever TI releases a new edition of the CPI, the organization plays up certain themes or claims that, according to TI, the CPI reveals about corruption’s causes or impact. This year, one of the main themes in the report is the connection between corruption and campaign finance regulation. As this year’s lead TI press release on the CPI declares, “Analysis [of the data] shows that countries that perform well on the CPI also have stronger enforcement of campaign finance regulations.… Countries where campaign finance regulations are comprehensive and systematically enforced have an average score of 70 on the [100-point] CPI, whereas countries where such regulations either don’t exist or are so poorly enforced score an average of just 34 or 35 respectively.” (On the CPI, higher scores indicate lower perceived corruption.)

How did TI arrive at this conclusion? The report accompanying the CPI, and the longer research brief on this topic, give a bit more explanation. TI used another index, from the Varieties of Democracy (V-Dem) project, on “Disclosure of Campaign Donations.” The V-Dem index rates countries’ disclosure requirements for campaign donations on a 0-4 ordinal scale. TI took this scale, collapsed the 0 and 1 categories into one (allegedly for “data visualization purposes,” though I’m not sure what this means), and then calculated the CPI score for the countries in each of the four categories. The results:

  • For those countries with a V-Dem disclosure score of 0/1 (no disclosure requirements or requirements that are partial and rarely enforced), the average CPI score was 34.
  • For countries with a V-Dem score of 2 (uncertain enforcement of disclosure rules) the average CPI was 35.
  • For countries with a V-Dem score of 3 (disclosure requirements exist and are enforced, but may not be fully comprehensive), the average CPI score was 55.
  • Countries with a V-Dem score of 4 (comprehensive and fully enforced disclosure requirements) had an average CPI score of 70

That looks like pretty strong evidence that strong campaign finance disclosure rules are associated with lower corruption, and that’s certainly the story TI wants to tell. As the report puts it, “Unregulated flows of big money in politics … make public policy vulnerable to undue influence.” The research brief similarly explains, “Shedding light on who donates and how much, can expose the influence of money in politics and deter corruption and other pay-to-play situations.”

The claim may ultimately be correct, but on closer inspection, the evidence TI adduces in support of that claim is deeply problematic. Continue reading