Blog — Supreme Court

October 30, 2013

California Dark Money Case Reveals Complex Schemes to Hide Donors

By Adam Rappaport

Corporate MoneyYesterday, the California Fair Political Practices Commission (CFPPC) announced a $1 million settlement with two Koch brothers-related nonprofit groups for failing to disclose their involvement in 2012 campaigns related to two California ballot initiatives.  CFPPC also told the groups to turn over the $15 million in contributions they received as part of a complex money laundering scheme to fund political activities without disclosing the source of the funds that reveals several important facts about the current state of dark money and campaign finance laws.

The scheme involved millions of dollars raised by Americans for Job Security (AJS), a Virginia group organized as a business league under section 501(c)(6) of the tax code, for a 2012 “issue advocacy” campaign related to two California ballot propositions.  AJS raised $29 million for the campaign, but as Election Day approached the group became concerned its efforts might be considered “express advocacy” under California law, which would require it to disclose its donors.  So AJS donated $25 million to the Center to Protect Patient Rights (CPPR), a Koch brothers-related section 501(c)(4) group, and CPPR gave $18 million to another 501(c)(4) group that then gave $11 million to a California political action committee fighting the propositions.  CPPR also gave $7 million to the American Future Fund, an Iowa-based 501(c)(4) group, which immediately created a California affiliate and gave it $4 million to spend on the ballot initiatives.

The failure to disclose CPPR’s donations intended to be used on the ballot questions led to CFPPC’s lawsuit and the settlement.  AJS, however, had no obligation under California law to report its contribution because CPPR technically could have used it for any purpose, or to disclose its donors because they gave for an issue advocacy campaign that didn’t specifically call for people to vote for or against the initiatives.  The announcement of the settlement was followed by the startling unintentional disclosure of many of AJS’s donors through the release of a donor list lawyers for a Republican fundraiser provided to CFPPC but poorly redacted.  This allowed reporters to ascertain that most of the money came from billionaires such as the owners of the Gap clothing chain, Charles Schwab, Eli Broad, and Sheldon Adelson, as well as Crossroads GPS.

This scheme highlights the increasing use of section 501(c)(6) by groups acting as both participants in political campaigns and conduits for dark money.  In the two election cycles since Citizens United, section 501(c)(4) “social welfare” groups such as Crossroads GPS and CPPR sprang up and took the lead in using and moving dark money.  Recent disclosures show that a new Koch brothers-related 501(c)(6) group, Freedom Partners, served as a conduit in 2012 for hundreds of millions of dollars given to politically active 501(c)(4)s.  Starting in 1998, AJS pioneered using section 501(c)(6) for secretive political activity, spending millions every cycle in a diverse range of political and issue-based campaigns.  With the attention of Congress, the IRS, and state regulators on section 501(c)(4) groups, those interested in continuing to secretly spend money on politics are likely to increase their use of section 501(c)(6) organizations.  State regulators have less jurisdiction over these groups, and federal laws and regulations on the books offer few clear limits on their activities.

One lesson from the settlement is that state laws can help fill in some of the gaps of federal campaign finance law, but even these stronger laws have loopholes that can be exploited.  California’s law made it possible for CFPPC to track the money back to CPPR, but no further.  In the wake of the dark money spending on the ballot measures, several bills strengthening the rules were introduced in the California legislature, but none has passed.

The extraordinary byzantine arrangements made to evade California’s law also have a broader implication for one of the central arguments made earlier this month in the Supreme Court in McCutcheon v. Federal Election Commission, the case involving the constitutionality of aggregate limits on contributions to federal candidates and parties.  CREW and others who support the limits argued eliminating them will lead to complex schemes allowing contributors to give millions of dollars to candidates.  Justice Alito dismissed these potential consequences as unrealistic “wild hypotheticals.”  Yet just to evade disclosure, donors and interest groups used an elaborate web of organizations to funnel money to the California effort, with each dollar given by a donor being transferred four times before arriving at the organization that spent it.  And this scheme is hardly the only one.  A network of Koch brothers-related groups used multiple transfers and obscure tax instruments in 2012 to make the dark money even harder to track.  It is difficult to believe the clever lawyers and political operatives who came up with these systems won’t do the same to circumvent contribution limits.

This blog post was updated on 10/30 to clarify that lawyers for a Republican fundraiser, not AJS, provided the donor list to CFPPC.


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