Best Practices: Politics
Give Wisely
Jill Duman
01/01/2008

With the national elections only months away, affluent voters of all political stripes are being hounded mercilessly for donations. Campaigns, causes and committees all desperately want cash, and they make it quite easy for high-net-worth individuals to make sizeable contributions—maybe too easy.

Campaign finance experts say there has never been a more critical time to exercise caution when making political donations. The laws governing where, when and how much donors can contribute are very specific, and promise various penalties should violations occur. "My advice to contributors is, don’t assume the federal government isn’t going to come knocking," warns Michael Toner, the former chair of the Federal Elections Commission (FEC) and a current partner in the Washington, D.C., law firm Bryan Cave.

Individual election code violators have attracted the attention of the FEC and, in criminal prosecution cases, the Justice Department. Most of the violators who have made headlines recently were rapped for what FEC spokesman Bob Biersack describes as "conscious efforts to either avoid areas in the law or manipulate the law." For example, Norman Hsu, the fundraiser facing fraud and campaign finance violation charges, is believed to have raised well over $1 million for Hillary Clinton’s presidential campaign. Much of the money came in the form of bundled checks, the origins of which became suspect when the fraud charges against Hsu became public. Another high-profile case involves a Michigan trial lawyer, Geoffrey Fieger, who was indicted on federal charges that he funneled $127,000 in contributions to the 2004 presidential campaign of John Edwards. Meanwhile, Tab Turner, an Arkansas trial lawyer, paid a $50,000 FEC civil penalty for making contributions in the names of others and using corporate facilities in support of raising money for a federal candidate.

TOP VIEW
With elections only months away, the political fundraising machinery is working overtime to raise needed funds—specifically from high-net-worth donors. Unfortunately, the campaign finance regulations that govern political contributions are labyrinthine and largely a mystery to the general public. Experts warn that before individuals write checks to their candidate or cause of choice, they should be sure the donations follow federal guidelines. The pen-alties for ignoring these laws are stiff.

The McCain-Feingold Act, formally known as the Bipartisan Campaign Reform Act of 2002, profoundly enhanced criminal and civil penalties for election law violations. Toner says, "The FEC has really had its hand strengthened in pursuing wrongdoing." Prior to McCain-Feingold, in the vast majority of cases in which a donor was found to have broken the law, it often would be a misdemeanor or the donor would plead out. With criminal penalties, Toner says, "you’re looking at hard time and a felony conviction, and that ups the ante."

Dubious Donations
McCain-Feingold’s stricter penalties—combined with bans on so-called soft money, new limits on hard money, and targeted campaigning by IRS tax-exempt 527 organizations—have led to record FEC enforcement. (Named for the section in the tax code that defines them, 527 groups raise money for political activities other than express advocacy of the election or defeat of a federal candidate; they have not been subject to FEC oversight.)

In 2006 the FEC collected $6.2 million in fines—more than twice as much as it ever collected in any of its previous 30 years. Early reports for 2007 indicate that the commission collected $2.5 million during the first six months of the year. The largest fines levied by the commission in the past two years have been against corporations and committees. In 2006, the FEC imposed a record $3.8 million fine on the federally chartered home mortgage company Freddie Mac, along with a total of $630,000 on the MoveOn.org Voter Fund, Swiftboat Veterans and POWs for Truth, and the League of Conservation Voters—all 527 groups. In 2007, the FEC received a $750,000 settlement in a case against the 527 group Progress for America Voter Fund and another $775,000 penalty from the America Coming Together PAC.

Historically, the FEC has not focused on individual donors, as evidenced by the fact that there have been no actions against contributors to the 527 groups making headlines in recent years. But that could change as Congress and the FEC continue to interpret and massage election law. New regulations in 2008 require federal campaigns to disclose the names of lobbyists who gather together or bundle donations of more than $15,000 in a semiannual period. Additional disclosure requirements for large-scale donors could come, Toner says. "If history is any guide, the enactment of one set of finance restrictions often leads to additional ones in other areas." He adds that the FEC has indicated that it may begin taking a harder look at the role significant donors play in contributions that later result in agency enforcement. "That would be a sea change," he says.

Furthermore, the scrutiny of 527 organizations by the commission has essentially closed what many believe is a loophole in election finance law. "It has, in effect, shut them down as a vehicle," says Jan Witold Baran, a consultant in Washington, D.C., who advises corporations, political groups, trade associations, PACs and individuals on compliance. As a result, Baran advises that donors make contributions to 527 groups with great caution. The IRS has also indicated that it may begin pursuing its own investigations into complaints about tax-exempt groups engaging in illegal political activity—further evidence of the quagmire that political giving has become.

Dos and Don’ts
Current interpretations of McCain-Feingold provisions already require that donors navigate a confusing morass of overlapping inflation-adjusted donation limits. For example, an individual donor may give $2,300 to each presidential candidate committee per election—for a total of $4,600 during this election year, when there is both a primary and general election. Donors may make their general-election contributions prior to the primary. (If the candidate is not nominated, there are rules about how that money should be returned.)


(Click image to enlarge)

An individual donor can also contribute up to $28,500 per calendar year to a national party committee, up to $10,000 (combined) per calendar year to local, district and state party committees, and up to $5,000 per calendar year to any other political organizations. But the combined donations cannot exceed a biennial limit of $108,200. "When it comes to individual contributions, the blunders are always the same," Baran says. "People just don’t keep track of the contributions they made, and they end up going over their aggregate limits."

Steve Churchwell, a partner in the law firm DLA Piper and a general counsel for California’s Fair Political Practices Commission from 1993 to 2000, says that when campaigns have activities that span two calendar years, even a contributor who participates at a modest level could unknowingly exceed the limit of $2,300 per candidate per election by donating at several events. The ease of making credit card contributions through the Internet exacerbates this problem. Many sites are not traditional PACs, but rather act as conduits to particular candidates.

There are still other restrictions that donors need to consider. Any donation, including the use of a jet, supplies or materials—even the food or drink donors serve at parties (limited to $2,000 per year)—may count as contributions against the biennial limit. Nominal fees for room rentals do not count as contributions. "A contribution is anything of value, so it’s not just the checks they write," Baran says.

If a contributor sells an item or service to a committee, that item or service becomes a donation if the donor asks less than the customary price. Legal and accounting services may be contributed to a candidate or PAC, but only if the services are for the purpose of complying with federal campaign finance laws, and do not further the election of a federal candidate. The campaign that receives the service must report its value, based on the amount paid to the people who provided the accounting or legal service by their employers. "Generally, the rule is fair market value for anything that is nonmonetary," Churchwell says.

Big-Donor Blues
Before making campaign contributions, consult an attorney.

Donors who want to have a substantial impact on federal elections are finding that they need expert help to handle and track their contributions—especially as the names of high-profile donors crop up in database searches regularly publicized in news reports and disseminated on the Internet.

"Wealthy individuals are increasingly aware that there are limits, and that it’s convoluted," says Jan Witold Baran, a campaign finance expert. If people are donating at these higher levels, they really need assistance in monitoring their contributions, he says.

"The one thing we know for sure is that if you do something wrong, you will become part of the news cycle in a way you would not like," says Larry Sabato, the director of the Center for Politics at the University of Virginia, who writes and comments on American politics. "It’s all available online. It’s really easy to look into this, and often—given the number of donors—you’re going to find someone who has done something wrong."

That kind of potential for bad publicity is enough to make wealthy donors and corporations effective targets for enforcement. For that reason alone, management of campaign donations is rapidly becoming a professional legal specialty. "Just like you might hire an accountant, the campaign finance area is becoming a niche," former FEC chairman Michael Toner says.

Illustration by James Steinberg.

Jill Duman is a freelance writer based in Davis, Calif.