Super-PACs and Dark Money: The New World of Corruption-Ripe Campaign Finance

The nation is gearing up for yet another “most expensive election in history,” the quadrennial exercise in which mind-numbing amounts of money pour into the political system. But this year promises more than just record spending—more money will be flowing from more players with more opportunities to hide the source.

Emboldened by recent court decisions, groups such as Crossroads GPS (formed by Republican strategist Karl Rove), Priorities USA (formed by former aides to President Obama) and Americans for Prosperity (formed by libertarian billionaire David Koch) have been busy raising huge sums from wealthy donors freed from old contribution limits.

The chief umpire in this game—the Federal Election Commission—is still struggling to write the rules for the hodgepodge of strange-sounding groups feeding the system. 527s? Super-PACs? Even Super-Duper PACs? ProPublica decided a guide is in order.

How We Got Here

Campaign finance changed dramatically after the Watergate scandal, when Congress set up the FEC, tried to eliminate hidden donations and limited contributions to federal candidates and political action committees, or PACs.

The next major change came in 2002. The McCain-Feingold law banned political parties from collecting “soft money,” or unlimited contributions from corporations, unions and others, and limited the ability of special-interest groups to run so-called “issue” ads that in reality attacked or supported candidates.

Courts and the FEC almost immediately started gnawing at the new law. And in recent years, three court decisions rolled back many of the limits on special-interest groups and potentially opened the door to foreign governments or corporations spending freely on campaigns through U.S. corporations they control. (FEC regulations ban foreign nationals from contributing, but they say nothing about a foreign corporation donating money through a U.S.-operated subsidiary.)

In September 2009 a federal appeals court, in EMILY’s List v. Federal Election Commission, struck down FEC regulations and opened the door for political nonprofits like EMILY’s List, which backs female Democrats who support abortion rights, to spend significantly more money on campaign activities.

In January 2010, the Supreme Court dealt a major blow to McCain-Feingold. Ruling in Citizens United v. Federal Election Commission, the court said that the government cannot prevent corporations and unions from spending unlimited money to support or criticize specific candidates.

Drawing on this decision in March 2010, a federal appeals court ruled in SpeechNow.org v. Federal Election Commission that political committees making  independent expenditures—that is, spending not coordinated with or directed by a candidate’s campaign—could accept donations of unlimited size.

Together, the rulings super-charged some existing fundraising groups and paved the way for new ones. The FEC, deadlocked for months on issues of disclosure and foreign money, has not yet written new rules interpreting the court decisions. That’s left the field open for political strategists and lawyers.

“We’re in very dangerous territory,” said Fred Wertheimer, president of Democracy 21, a campaign-finance watchdog group. “There’s one word to describe what’s going on in the campaign-finance area: The word is ‘obscene.’ And it’s going to result in scandal and corruption and, eventually, opportunities for reform.”

Advocates say the changes are needed to protect the First Amendment rights of corporations and certain nonprofits.

“Campaign-finance laws inhibit free speech,” said Sean Parnell, president of the Center for Competitive Politics, which views most campaign-finance laws as government meddling.  “The First Amendment is not a guarantee that all voices will be heard as often or as effectively as all other voices. It’s just a guarantee that the government won’t step in and say, ‘OK, you’ve spoken enough.’”

Super-PACs: Sky’s the Limit

In the old days there were just PACs—political action committees that could accept donations of up to $5,000 from individuals and pass the money along to the candidates and parties they chose.

Now, there are Super-PACs—committees that, thanks to the court decisions, can raise and spend unlimited sums of money from individuals, corporations, unions and other groups. Known officially as “independent expenditure-only committees,” they can’t donate directly to candidates but can promote them and attack their opponents, so long as they don’t coordinate with any candidate or political party.

Super-PACs are still new, having debuted by spending more than $80 million on the 2010 midterm elections. Republicans pioneered the groups, but Democrats jumped in, too. Many of these new entities have innocuous-sounding names that make it hard to guess their true political intent: Concerned Taxpayers of America, Citizens for a Working America, We Love USA. (And then there’s comedian Stephen Colbert’s new Super-PAC: Americans for a Better Tomorrow, Tomorrow.) More than 100 are now registered with the FEC.

Like ordinary PACs, Super-PACs must disclose their donors. But because of time lags in reporting, months can go by before the identities of million-dollar donors are revealed; some weren’t disclosed until after the 2010 midterm elections. Loopholes can also allow donors to stay hidden, such as when money comes from a nonprofit that doesn’t have to disclose how it’s funded.

Last month, the campaign-finance watchdog group Center for Responsive Politics found five Super-PACs that attributed a vast majority—and in some cases all—of their funding to affiliated nonprofits that are not required to reveal donors.

Most PACs will file their first fundraising reports of the year Friday, but two Super-PACs that had to file early reported raising more than $4.6 million. American Crossroads, formed by Rove to support Republican candidates, raised $3.8 million. The House Majority PAC, aimed at reclaiming the Democratic majority lost in 2010, raised $800,000.

527s: Yesterday’s Super-PACs

Named for the tax code governing them, “527” groups were sort of a precursor to Super-PACs.

Historically, 527s had a choice—they could register as PACs and give directly to candidates under FEC limits, or they could focus on issues, allowing them to raise and spend unlimited amounts. These issue-oriented 527s were not supposed to promote or attack candidates directly, and they often focused on hot-button topics such as guns or abortion.

Strict 527 groups first played a major role in the 2004 election, blurring the line between advocating for an issue and a candidate. Three paid fines for breaking laws barring them from directly supporting or criticizing candidates.

Because of the recent court rulings, some 527s have decided to become Super-PACs so they can both raise unlimited amounts and advocate for candidates.

That said, 527 groups still played an important role in the 2010 mid-term elections, spending more than $415 million, according to the Center for Responsive Politics.

501(c)’s: The Invisibles

Also named for their section in the IRS tax code, these tax-exempt organizations include charities, civic leagues and unions. (Leave it to the IRS to make their descriptions resemble algebra homework.)

Charities that fall under the 501(c)(3) heading are not allowed to be involved in political campaigns, but other 501(c) organizations are allowed to, at least to a certain extent. That includes 501(c)(4) “social welfare” organizations, a class that includes groups like the AARP and the NAACP; 501(c)(5) labor unions, like the Teamsters; and 501(c)(6) trade associations, like the U.S. Chamber of Commerce.

These groups could always pursue political activities while raising unlimited funds and without disclosing donors – but only if their primary purpose wasn’t politics. The Sunlight Foundation described them as “perhaps the most opaque political players since pre-Watergate days of anonymous cash contributions to candidates.”

The best-known of these groups is the Tea Party-supporting Americans for Prosperity, a 501(c)(4) group cofounded by billionaire David Koch, who with his brother Charles is credited with pioneering some of the bolder new campaign fundraising tactics.

Why donate anonymously, when influence is the goal? Experts say that secret giving can shield corporations from blowback when supporting controversial causes, and it can make a corporate-funded effort appear to be grassroots. Plus, no rule prevents donors from telling politicians directly about their support if it suits their needs.

“Say I gave a million dollars to Crossroads GPS,” said Rick Hasen, a law professor at the University of California-Irvine who runs Election Law Blog. “You can tell the whole Republican leadership that. ProPublica can’t find it, but the people you are trying to influence can find it.”

So, to review: Super-PACs focus only on politics but must disclose their donors. The 501(c) groups must not have politics as their primary purpose but don’t have to disclose who gives them money.

But it gets even more interesting when the two groups combine powers.

Say some like-minded people form both a Super-PAC and a nonprofit 501(c)(4). Corporations and individuals could then donate as much as they want to the nonprofit, which isn’t required to publicly disclose funders. The nonprofit could then donate as much as it wanted to the Super-PAC, which lists the nonprofit’s donation but not the original contributors.

This isn’t just hypothetical. Karl Rove set up this model with the Super-PAC American Crossroads and the nonprofit Crossroads GPS. While some Democrats complain about the influence of so-called “dark money,” others have started to follow in his footsteps.

Now the IRS seems to be stepping in—or thinking about it. The IRS in May warned major funders of 501(c)(4) groups that their donations could be subject to gift taxes, but the agency announced last week that it would hold off on enforcement while it studies the issue.

More debate is likely. A few Democrats have already sued the FEC to try to force the disclosure of donors.

Up Next: The Super-Duper PAC?

If that’s not complicated enough, several groups are pushing PACs and Super-PACs into uncharted territory by creating what’s been unofficially called “Super-Duper PACs.” They’re so new there’s no agreed-upon definition—and in fact, at this point, there are at least two.

Mother Jones used the term “Super-Duper PAC” in May when reporting on a plan by Republican attorney James Bopp to recruit candidates to solicit unlimited funds for Super-PACs, which could then spend money promoting that candidate.

The FEC gave that plan the partial smackdown last month, ruling that candidates can ask donors to give to a Super-PAC, but only  up to $5,000.(Probably not coincidentally, $5,000 is the most individuals can donate to PACs that give directly to candidates.)

Nonetheless, Bopp—the lawyer behind Citizens United—has claimed it as a victory, maintaining that the $5,000 limit is “meaningless.” Why? Because though a candidate might only ask for that much, anyone could donate more.

Following their conservative counterparts, Democrats such as House Minority Leader Nancy Pelosi and Senate Majority Leader Harry Reid now have started soliciting supporters for donations to Democratic Super-PACs.

Some campaign-finance watchers have referred to the “Super-Duper PAC” as a combination of a Super-PAC and a traditional PAC that’s not officially tied to a candidate, party, corporation, union or trade group.

Making the case for this super hybrid, the National Defense PAC, which supports Republican and Tea Party-backed veterans running for office, has sued the FEC and argued that it should be able to donate to candidates (which traditional PACs can do but Super-PACs cannot)and raise unlimited funds for independent expenditures (which Super-PACs can do but traditional PACs cannot).

A federal judge agreed, granting a preliminary injunction last month against the FEC. The judge said the two types of activities could be performed by one Super-PAC—so long as the bank accounts are kept separate and the money going to directly candidates is within regular PAC contribution limits.

The matter still awaits a definitive ruling, but Dan Backer, the lawyer representing the National Defense PAC, predicts that by the end of the year, more Super-PACs will be moving in this direction.

–Kim Barker and Marian Wang, ProPublica