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by Jake Bernstein

A version of this story was co-published with The Washington Post.

In the spring of 2012, a senior examiner with the Federal Reserve Bank of New York determined that Goldman Sachs had a problem.

Under a Fed mandate, the investment banking behemoth was expected to have a company-wide policy to address conflicts of interest in how its phalanxes of dealmakers handled clients. Although Goldman had a patchwork of policies, the examiner concluded that they fell short of the Fed’s requirements.

That finding by the examiner, Carmen Segarra, potentially had serious implications for Goldman, which was already under fire for advising clients on both sides of several multibillion-dollar deals and allegedly putting the bank’s own interests above those of its customers. It could have led to closer scrutiny of Goldman by regulators or changes to its business practices.

Before she could formalize her findings, Segarra said, the senior New York Fed official who oversees Goldman pressured her to change them. When she refused, Segarra said she was called to a meeting where her bosses told her they no longer trusted her judgment. Her phone was confiscated, and security officers marched her out of the Fed’s fortress-like building in lower Manhattan, just 7 months after being hired.

“They wanted me to falsify my findings,” Segarra said in a recent interview, “and when I wouldn’t, they fired me.”

Today, Segarra filed a wrongful termination lawsuit against the New York Fed in federal court in Manhattan seeking reinstatement and damages. The case provides a detailed look at a key aspect of the post-2008 financial reforms: The work of Fed bank examiners sent to scrutinize the nation’s “Too Big to Fail” institutions.

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• Former New York Fed examiner, Carmen Segarra, says she was fired after uncovering problems with Goldman Sachs' conflict-of-interest policy.
• Segarra says her supervisors pressured her to falsify her findings that Goldman's policies were inadequate, and she refused.
• Segarra and New York Fed colleagues recommended Goldman be downgraded because of deficient policies.
• Segarra found that Goldman's efforts to wall off conflicts in a multi-billion dollar energy deal was full of holes.

In hours of interviews with ProPublica, the 41-year-old lawyer gave a detailed account of the events that preceded her dismissal and provided numerous documents, meeting minutes and contemporaneous notes that support her claims. Rarely do outsiders get such a candid view of the Fed’s internal operations.

Segarra is an expert in legal and regulatory compliance whose previous work included jobs at Citigroup and the French bank Société Générale. She was part of a wave of new examiners hired by the New York Fed to monitor systemically important banks after passage in July 2010 of the Dodd-Frank regulatory overhaul, which gave the Fed new oversight responsibilities.

Goldman is known for having close ties with the New York Fed, its primary regulator. The current president of the New York Fed, William Dudley, is a former Goldman partner. One of his New York Fed predecessors, E. Gerald Corrigan, is currently a top executive at Goldman. At the time of Segarra’s firing, Stephen Friedman, a former chairman of the New York Fed, was head of the risk committee for Goldman’s board of directors.

In an email, spokesman Jack Gutt said the New York Fed could not respond to detailed questions out of privacy considerations and because supervisory matters  are confidential. Gutt said the Fed provides “multiple venues and layers of recourse for employees to freely express concerns about the institutions it supervises.”

“Such concerns are treated seriously and investigated appropriately with a high degree of independence,” he said. “Personnel decisions at the New York Fed are based exclusively on individual job performance and are subject to thorough review. We categorically reject any suggestions to the contrary.”

Dudley would not have been involved in the firing, although he might have been informed after the fact, according to a Fed spokesman.

Goldman also declined to respond to detailed questions about Segarra. A spokesman said the bank cannot discuss confidential supervisory matters. He said Goldman “has a comprehensive approach to addressing conflicts through firm-wide and divisional policies and infrastructure” and pointed to a bank document that says Goldman took recent steps to improve management of conflicts.

Segarra’s termination has not been made public before now. She was specifically assigned to assess Goldman’s conflict-of-interest policies and took a close look at several deals, including a 2012 merger between two energy companies: El Paso Corp. and Kinder Morgan. Goldman had a $4 billion stake in Kinder Morgan while also advising El Paso on the $23 billion deal.

Segarra said she discovered previously unreported deficiencies in Goldman’s efforts to deal with its conflicts, which were also criticized by the judge presiding over a shareholder lawsuit concerning the merger.

Her lawsuit also alleges that she uncovered evidence that Goldman falsely claimed that the New York Fed had signed off on a transaction with Santander, the Spanish bank, when it had not. A supervisor ordered her not to discuss the Santander matter, the lawsuit says, allegedly telling Segarra it was “for your protection.”

‘Eyes Like Saucers’

The New York Fed is one of 12 regional quasi-private reserve banks. By virtue of its location, it supervises some of the nation’s most complex and important financial institutions. After the 2008 financial crisis, disparate voices pointed to failures of enforcement by the New York Fed as a key reason banks took on too much risk.

Even Fed officials acknowledged shortcomings. After Dodd-Frank, new examiners like Segarra, called "risk specialists," were hired for their expertise. They were in addition to other Fed staffers, dubbed "business line specialists," some of whom were already embedded at the banks.

Segarra believed she had found the perfect home when she joined the New York Fed's legal and compliance risk specialist team in October 2011. It was a prestigious job, insulated from business cycles, where she could do her part to prevent another financial meltdown. Her skills, honed at Harvard, Cornell Law School and the banks where she had worked, consisted of helping to create the policies and procedures needed to meet government financial regulations.

As part of their first assignment, Fed officials told Segarra's group of risk specialists to examine how the banks in which they were stationed complied with a Fed Supervision and Regulation Letter issued in 2008.

The letter, known as SR 08-08, emphasizes the importance of having company-wide programs to manage risks at firms like Goldman, which engage in diverse lines of business, from private wealth management and trading to mergers and acquisitions. The programs are supposed to be monitored and tested by bank compliance employees to make sure they are working as intended.

“The Fed recognized that financial conglomerates should act like truly combined entities rather than separate divisions or entities where one group has no idea what the other group is doing,” said Christopher Laursen, an economic consultant and former Federal Reserve employee who helped draft the supervisory letter.

In 2009, a review by the Fed had found problems with its efforts to ensure that banks followed the policy, which also says that bank compliance staffers must “be appropriately independent of the business lines” they oversee.

Segarra’s team included examiners placed at nine other “Too Big to Fail” banks, including Citigroup, JPMorgan Chase, Deutsche Bank and Barclays.

.right-sidebar-media h2.explainer { font-size: 20px; font-weight: bold; font-family: "ff-meta-serif-web-1", "ff-meta-serif-web-2", "Georgia", serif; margin-bottom: 10px; } .right-sidebar-media p.explainer { font-size: 12px; font-family: "Helvetica Neue", Arial, sans-serif; } .right-sidebar-media p.deal { text-transform: uppercase; font-weight: bold; } Goldman's Controversial Plays

A sampling of deals that have posed conflicts of interest for Goldman Sachs:

Kinder Morgan-El Paso

The Deal: In 2011, gas pipeline operator Kinder Morgan agreed to buy pipeline operator El Paso Corp. for $21.1 billion. Goldman advised El Paso on the deal.
The Issue: Goldman owned 19 percent of Kinder Morgan and controlled two board seats. Goldman’s lead banker for El Paso failed to disclose owning $340,000 in Kinder Morgan stock.
Aftermath: A Delaware judge declined to stop the deal but criticized Goldman and El Paso’s management for conflicts of interest.

Abacus

The Deal: Abacus 2007-AC1 was a mortgage-backed security created by Goldman. Investors in the deal lost over $1 billion, contributing to the financial crisis.
The Issue: Goldman failed to disclose that hedge fund manager John Paulson had helped pick assets for the security that he wanted to bet against.
Aftermath: In 2010, Goldman settled with the SEC for $550 million; Goldman V.P. Fabrice Tourre was found liable of securities fraud earlier this year.

Stephen Friedman

The Deal: In the midst of the 2008 financial crisis, Goldman won approval from the Federal Reserve to convert to a bank holding company and later received federal bailout money.
The Issue: Stephen Friedman, then chairman of the New York Federal Reserve, sat on Goldman’s board and bought 37,300 shares of Goldman while helping plan the Wall Street bailout.
Aftermath: Friedman resigned from the Fed shortly after news of his stock purchases broke in 2009; last spring, he retired from the Goldman board.

Solyndra

The Deal: Goldman was hired in 2008 by Solyndra, a California-based solar panel manufacturer, and secured Solyndra a $535 million loan guarantee from the U.S. Department of Energy.
The Issue: Goldman netted fees as an adviser but reportedly decided against investing its own money into Solyndra.
Aftermath: In 2011, Solyndra filed for bankruptcy and laid off 1,100 workers, spurring a government investigation into whether Solyndra misled officials about its finances.

Archipelago-NYSE

The Deal: In 2005, the New York Stock Exchange bought Archipelago Holdings, which ran a rival electronic trading network.
The Issue: Goldman advised Archipelago and saw its stake in the company surge — as did value of Goldman’s seats on the NYSE, then headed by former Goldman President John Thain.
Aftermath: The NYSE settled a member suit that claimed Goldman gave conflicted advice.

Reported by Liz Day

Segarra said her bosses told her to focus on Goldman’s conflict-of-interest policies. The firm had long been famous for trying to corral business from every part of the deals it worked on. “If you have a conflict, we have an interest,” is an oft-told joke on Wall Street about the firm’s approach.

The year before Segarra joined the Fed, for instance, Goldman had received a drubbing from the Securities and Exchange Commission and a Senate subcommittee over conflicts related to Abacus, a mortgage transaction the bank constructed. The SEC imposed a $550 million fine on the bank for the deal. A January 2011 Goldman report concluded that the firm should "review and update conflicts-related policies and procedures, as appropriate."

Initial meetings between the New York Fed and Goldman executives to review the bank’s policies did not go well, said Segarra, who kept detailed minutes.

When the examiners asked in November 2011 to see the conflict-of-interest policy, they were told one didn’t exist, according to the minutes. “It’s probably more than one document — there is no one policy per se,” the minutes recount one Goldman executive as saying.

The discussion turned to the name of the group that oversaw conflicts at Goldman: “Business Selection and Conflicts Resolution Group.” Segarra’s supervisor, Johnathon Kim, asked if business selection and conflicts were, in fact, two different groups. He was told they were not, the minutes show.

Goldman officials stated that the bank did not have a company-wide conflict-of-interest program, Segarra’s minutes show. Moreover, the head of the business selection and conflicts group, Gwen Libstag, who is not a lawyer, said in a subsequent meeting on Dec. 8 that she did not consider what her staff did a “legal and compliance function,” according to Segarra’s minutes.

“That’s why it’s called business selection,” another Goldman executive added. “They do both.”

Given the Fed’s requirements, the regulators were stunned, Segarra recounted in an interview. “Our eyes were open like saucers,” she said. “Business selection is about how you get the deal done. Conflicts of interest acknowledge that there are deals you cannot do.”

After the Dec. 8 meeting, the New York Fed’s senior supervising officer at Goldman, Michael Silva, called an impromptu session with Fed staffers, including Segarra. Silva said he was worried that Goldman was not managing conflicts well and that if the extent of the problem became public, clients might abandon the firm and cause serious financial damage, according to Segarra’s contemporaneous notes.

A Chinese Wall In Their Heads

As part of her examination, Segarra began making document requests. The goal was to determine what policies Goldman had in place and to see how they functioned in Kinder Morgan’s acquisition of El Paso. The merger was in the news after some El Paso shareholders filed a lawsuit claiming they weren’t getting a fair deal.

Although Segarra reported directly to Kim, she also had to keep Silva abreast of her examinations. Silva, who is also a lawyer, had been at the Fed for 20 years and previously had served as a senior vice president and chief of staff for Timothy Geithner while he was New York Fed president. As a senior vice president and senior supervisor, Silva outranked Kim in the Fed hierarchy.

Segarra said James Bergin, then head of the New York Fed’s legal and compliance examiners, noted at a November meeting that there was tension between the new risk specialists and old-guard supervisors at the banks. Segarra said the tension surfaced when she was approached in late December by a Fed business line specialist for Goldman, who wanted to change Segarra’s Dec. 8 meeting minutes.

Segarra told her Fed colleague that she could send any changes to her. When Segarra next met with her fellow risk specialists, she said she told them what had transpired. They told her that nobody should be allowed to change her meeting minutes because they were the evidence for her examination.

Around that time, Silva had a meeting with Segarra, she said. According to her notes, Silva warned her that sometimes new examiners didn’t recognize how they are perceived and that those who are taken most seriously are the most quiet. Segarra took it as more evidence of tension between the two groups of regulators.

Bergin, Silva and Kim did not respond to requests for comment.

By mid-March 2012, Goldman had given Segarra and a fellow examiner from the New York State Banking Department documents and written answers to their detailed questions. Some of the material concerned the El Paso-Kinder Morgan deal.

Segarra and other examiners had been pressing Goldman for details about the merger for months. But it was from news reports about the shareholder lawsuit that they learned the lead Goldman banker representing El Paso, Steve Daniel, also had a $340,000 personal investment in Kinder Morgan, Segarra said.

Delaware Chancery Court Judge Leo Strine had issued a 34-page opinion in the case, which eventually settled. The opinion castigated both El Paso’s leadership and Goldman for their poor handling of multiple conflicts of interest.

At the New York Fed, Goldman told the regulators that its conflict-of-interest procedures had worked well on the deal. Executives said they had “exhaustively” briefed the El Paso board of directors about Goldman’s conflicts, according to Segarra’s meeting minutes.

Yet when Segarra asked to see all board presentations involving conflicts of interest and the merger, Goldman responded that its Business Selection and Conflict Resolution Group “as a general matter” did not confer with Goldman’s board. The bank’s responses to her document requests offered no information from presentations to the El Paso board discussing conflicts, even though lawsuit filings indicate such discussions occurred.

Goldman did provide documents detailing how it had divided its El Paso and Kinder Morgan bankers into “red and blue teams.” These teams were told they could not communicate with each other — what the industry calls a “Chinese Wall” — to prevent sharing information that could unduly benefit one party.

Segarra said Goldman seating charts showed that that in one case, opposing team members had adjacent offices. She also determined that three of the El Paso team members had previously worked for Kinder Morgan in key areas.

“They would have needed a Chinese Wall in their head,” Segarra said.

Pressure To Change Findings

According to Segarra’s lawsuit, Goldman executives acknowledged on multiple occasions that the bank did not have a firm-wide conflict-of-interest policy.

Instead, they provided copies of policies and procedures for some of the bank’s divisions. For those that did not have a division-wide policy, such as the investment management division, they offered what was available. The policy for the private banking group stated that employees shouldn’t write down their conflicts in “emails or written communications.”

“Don’t put that in an email in case we get caught?” Segarra said in an interview. “That’s a joke.”

Segarra said all the policies were missing components required by the Fed.

On March 21, 2012, Segarra presented her conclusion that Goldman lacked an acceptable conflict-of-interest policy to her group of risk specialists from the other “Too Big to Fail” banks. They agreed with her findings, according to Segarra and another examiner who was present and has requested anonymity.

Segarra’s group discussed possible sanctions against the bank, but the final decision was up to their bosses. A summary sheet from the meeting recommended downgrading Goldman from “satisfactory” to “fair” for its policies and procedures, the equivalent of a “C” in a letter grade.

A week later, Segarra presented her findings to Silva and his deputy, Michael Koh, and they didn’t object, she said. Reached by ProPublica, Koh declined to comment.

In April, Goldman assembled some of its senior executives for a meeting with regulators to discuss issues raised by documents it had provided. Segarra said she asked Silva to invite officials from the SEC, because of what she had learned about the El Paso-Kinder Morgan merger, which was awaiting approval by other government agencies.

Segarra said she and a fellow examiner from New York state’s banking department had prepared 65 questions. But before the meeting, Silva told her she could only ask questions that did not concern the El Paso-Kinder Morgan merger, she said.

Nonetheless, SEC officials brought it up. Goldman executives said they had no process to check the personal holdings of bankers like Steve Daniel for possible conflicts, according to notes Segarra took at the time. Asked by Segarra for Goldman’s definition of “conflicts,” the bank’s general counsel, Greg Palm, responded that it could be found in the dictionary, she said.

“What they should have is an easy A-B-C approach to how to manage conflicts,” Segarra said. “But they couldn’t even articulate what was a conflict of interest.”

Goldman declined a request to make Palm available for comment.

As the Goldman examination moved up the Fed’s supervisory chain, Segarra said she began to get pushback. According to her lawsuit, a colleague told Segarra in May that Silva was considering taking the position that Goldman had an acceptable firm-wide conflict-of-interest policy.

Segarra quickly sent an email to her bosses reminding them that wasn’t the case and that her team of risk specialists was preparing enforcement recommendations.

In response, Kim sent an email saying Segarra was trying to “front-run the supervisory process.” Two days later, a longer email arrived from Silva, stating that “repeated statements that you have made to me that [Goldman] does not have a [conflict-of-interest] policy AT ALL are debatable at best, or alternatively, plainly incorrect.”

As evidence, Silva cited the 2011 Goldman report that called for a revamp of its conflict-of-interest procedures, as well as the company’s code of conduct — neither of which Segarra believed met the Fed’s requirements.

While not commenting on Goldman’s situation, Laursen, the consultant who helped draft the Fed policy, said the idea is to police conflicts across divisions. “It would need to be a high-level or firm-wide policy,” he said, that “would identify the types of things that should not occur and the processes and monitoring that make sure they don’t.”

In its email to ProPublica, Goldman cited a May report from its Business Standards Committee that says the company completed an overhaul of its business practices earlier this year that included new policies and training for managing conflicts.

Before Segarra could respond to Silva’s email, Koh summoned her to a meeting. For more than 30 minutes, he and Silva insistently repeated that they did not agree with her findings concerning Goldman, she said.

Segarra detailed all the evidence that supported her conclusion, she said. She offered to participate in a wider meeting with New York Fed personnel to discuss it further. Because Fed officials would ultimately have to ratify her conclusions, she let them know she understood that her findings were subject to change.

Silva and his deputy did not engage with her arguments during the meeting. Instead, they kept reiterating that she was wrong and should change her conclusions, she said.

Afterward, Segarra said she sent an email to Silva detailing why she believed her findings were correct and stating that she could not change them. There was just too much evidence to the contrary, she said in an interview.

Three business days later, Segarra was fired.

Segarra has no evidence that Goldman was involved. Silva told her that the Fed had lost confidence in her ability to follow directions and not jump to conclusions.

Today, Segarra works at another financial institution at a lower level than she feels her qualifications merit. She worries about the New York Fed’s ability to stop the next financial crisis.

“I was just documenting what Goldman was doing,” she said. “If I was not able to push through something that obvious, the Federal Reserve Bank of New York certainly won’t be capable of supervising banks when even more serious issues arise.”

ProPublica research director Liz Day contributed to this story.

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by Theodoric Meyer

This article has been updated to reflect new developments. It was first published on Jan. 31, 2011.

The Obama administration is reportedly preparing to cut much of the $1.55 billion in annual aid that the U.S. sends to Egypt.

The move, which has yet to be formally announced, comes after more than 1,000 Egyptians have died in a crackdown following the military coup this summer, including at least 51 who were killed on Sunday in clashes in Cairo and other cities. Most were apparently supporters of ousted president Mohamed Morsi.  

We've taken a step back and tried to answer some basic questions about the aid, including how much the U.S. is giving Egypt, what's changed in the years since the Arab Spring and what all the money buys.

How much does the U.S. spend on Egypt?

Egypt receives more U.S. aid than any country except for Israel, Afghanistan, Pakistan and Iraq.

The exact amount varies from year to year and there are many different funding streams, but U.S. foreign assistance to Egypt has averaged about $2 billion a year since 1979, when Egypt struck a peace treaty with Israel. Most of that goes toward military aid. President Obama’s 2014 budget tentatively included $1.55 billion in aid, about the same amount the U.S. has sent in recent years.

Has any of the aid been cut off?

Yes. The State Department said in August that it had put a hold on some of the programs financed by the $250 million in annual economic aid to Egypt, including training programs in the U.S. for Egyptian hospital administrators, teachers and other government workers. The administration is now planning to cut off all economic aid that goes directly to the Egyptian government, U.S. officials told the New York Times on Tuesday, but not aid for education, hospitals and similar activities.

What about the military aid?

We don’t know the details yet, but it appears most of the military aid will be cut off, too. The administration, which delayed a scheduled delivery of four F-16 fighters to Egypt in July, is now planning to halt more deliveries, including helicopters, tanks and fighter jets.

It’s not clear exactly how much of the military aid — which has held steady at about $1.3 billion since 1987 — will be cut off. (The economic aid, meanwhile, has fallen by more than two-thirds since 1998.) About $585 million of the aid of the 2013 fiscal year, which ended last week, has yet to be deposited in the Egyptian government’s account in the Federal Reserve Bank in New York, according to the Times.

The U.S. is unlikely to cut off aid that funds counterterrorism operations or security in the Sinai Peninsula and along Egypt’s border with Israel and the Gaza Strip, according to the Times and the Associated Press. The administration is expected to announce the exact cuts in the coming days.

American officials say that military aid doesn’t just promote peace between Egypt and Israel, it also gives the U.S. benefits such as “expedited processing” for U.S. Navy warships when they pass through the Suez Canal. A 2009 U.S. embassy cable released by WikiLeaks makes essentially the same point:

President Mubarak and military leaders view our military assistance program as the cornerstone of our mil-mil relationship and consider the USD 1.3 billion in annual FMF as "untouchable compensation" for making and maintaining peace with Israel. The tangible benefits to our mil-mil relationship are clear: Egypt remains at peace with Israel, and the U.S. military enjoys priority access to the Suez Canal and Egyptian airspace.

According to the State Department, the military aid has included tanks, armored personnel carriers, antiaircraft missile batteries and surveillance aircraft in addition to the F-16 fighters and Apache attack helicopters. In the past, the Egyptian government has bought some of the weaponry on credit.

How important is the aid to Egypt?

Pretty important. Saudi Arabia, which along with other Persian Gulf countries pledged $12 billion in aid to Egypt after the coup, promised to make up the difference in any aid cut by the U.S. or other Western nations. But much of the aid can’t easily be replaced, in particular the fancy American-made weaponry and replacements parts for them.

The Egyptian government declined to comment on the reported cuts on Wednesday.

“We have not been officially informed of any change,” BadrAbdellaty, a spokesman for the Egyptian Foreign Ministry, told the Washington Post. “Until the administration takes its decision and informs us officially, we cannot comment.”

Does the aid require Egypt to meet any specific conditions regarding human rights?

Not really. When an exiled Egyptian dissident called on the U.S. to attach conditions to aid to Egypt in 2008, Francis J. Ricciardone Jr., who had recently stepped down as the U.S. ambassador to Egypt, told the Washington Post the idea was "admirable but not realistic." And then-Defense Secretary Robert Gates said in 2009 that military aid "should be without conditions" at a Cairo press conference.

Sen. Patrick Leahy, a Vermont Democrat, led Congress in adding language to a spending bill in 2011 to make aid to Egypt conditional on the secretary of state certifying that Egypt is supporting human rights and being a good neighbor. The language requires that Egypt abide by the 1979 peace treaty with Israel, support "the transition to civilian government including holding free and fair elections," and put in place policies to protect freedom of expression, association, and religion, and due process of law." It sounds pretty tough, but it's not.

Has American aid to Egypt ever been cut off before?

No. Congress threatened to block aid last year when Egypt began a crackdown on a number of American pro-democracy groups. A senior Obama administration official said that then-Secretary of State Hillary Rodham Clinton had no way to certify the conditions set out in the spending bill were being met.

But Clinton waived the certification requirement (yes, the secretary of state can do that) and approved the aid, despite concerns about Egypt's human rights record. The reason? "A delay or cut in $1.3 billion in military aid to Egypt risked breaking existing contracts with American arms manufacturers that could have shut down production lines in the middle of President Obama's re-election campaign," the New York Times reported. Breaking the contracts could have left the Pentagon on the hook for $2 billion.

Doesn’t the U.S. have to cut off foreign aid after a coup?

The Foreign Assistance Act mandates that the U.S. cut aid to any country “whose duly elected head of government is deposed by military coup or decree.” But in July the White House decided that it was not legally required to decide whether Morsi, who was democratically elected last year, was the victim of a coup — which allowed the aid to keep flowing. “We will not say it was a coup, we will not say it was not a coup, we will just not say,” an anonymous senior official told the New York Times.

As the Washington Post’s Max Fisher points out, Obama and his predecessors have dealt this kind of thing before. The president cut some aid to Honduras after a coup in 2009 and to Mali and the Central African Republic after coups there in 2012, but not all of it. And those countries aren’t nearly as important to U.S. foreign policy as Egypt. President Bill Clinton cut some aid to Pakistan after a coup there in 1999, but President George W. Bush reinstated all of it after the Sept. 11, 2001, attacks.

Obama’s refusal to call it a coup infuriated Morsi supporters. “What is a coup?” Wael Haddara, a senior adviser to Morsi, told the New York Times. “We’re going to get into some really Orwellian stuff here.”

What about economic aid and efforts to promote democracy?

The various economic aid efforts have had mixed results. The State Department has described the Commodity Import Program, which gave Egypt millions of dollars between 1986 and 2008 to import American goods, as "one of the largest and most popular USAID programs." But an audit of the four-year, $57 million effort to create agricultural jobs and boost rural incomes in 2007 found that the program “has not increased the number of jobs as planned.” And an audit of a $151 million program to modernize Egypt's real estate finance market in 2009 found that, while the market had improved since the program began, the growth was "not clearly measureable or attributable" to the aid efforts.

The U.S. has also funded programs to promote democracy and good government in Egypt — again with few results. It has sent about $24 million a year between 1999 and 2009 to a variety of NGOs in the country. According to a 2009 inspector general's audit, the efforts didn't add much due to "a lack of support" from the Egyptian government, which "suspended the activities of many U.S. NGOs because Egyptian officials thought these organizations were too aggressive."

A recent audit of the European Union’s €1 billion — about $1.35 billion —aid program found that it had been “well-intentioned but ineffective” in promoting good governance and human rights. And a WikiLeaks cable revealed the Egyptian government had asked USAID in 2008 to stop financing NGOs that weren't properly registered.

Marian Wang contributed reporting.

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by Kim Barker

Smart move?

The IRS has granted nonprofit status to America Is Not Stupid – a so-called dark money group best known for a 2012 election ad featuring a talking baby who compared the smell of his diaper with a Montana senator.

As ProPublica wrote in January, America Is Not Stupid and a related group, A Better America Now, applied for IRS recognition in the run-up to the 2012 election, swearing under penalty of perjury that they would not spend money on elections.

Then both groups went ahead and did exactly that, spending more than $125,000 on mailers and ads opposing Democratic candidates in Texas and Montana.

Despite these disclosures, records show, the IRS gave A Better America Now its stamp of approval as a social welfare nonprofit in April and recognized America Is Not Stupid in late June, decisions that elicited amazement among campaign finance watchdogs.

Marcus Owens, a nonprofit lawyer who ran the IRS Exempt Organizations division from 1990 to 2000, questioned whether a controversy that erupted earlier this year, over the agency subjecting certain conservative nonprofits to extra review, had damaged its ability to fulfill its regulatory functions.

“The oversight has collapsed,” Owens said. “The current people in Exempt Organizations have no tax law enforcement experience and no exempt organization experience in particular. And they’ve been charged with making this particular headache go away.”

Because of the government shutdown, the IRS could not be reached for comment. In the past, the IRS has not commented on stories about specific groups. Talking about individual taxpayers violates the law.

No one from either America Is Not Stupid or A Better America Now responded to emails and phone calls asking for comment.

In May, the IRS admitted that it had flagged the applications of Tea Party and related groups for extra review, dooming many to years of limbo. That admission turned into a firestorm, leading to the immediate resignation of the acting IRS commissioner and the eventual replacement of the top officials in the Exempt Organizations division. Senate and House committees started investigating. The Treasury Inspector General for Tax Administration expanded its initial audit. And the Justice Department announced a criminal inquiry. (Later, records were released showing that the IRS was also flagging liberal groups with “progressive” in their names.)

Since the Supreme Court’s Citizens United ruling in early 2010 opened the door to increased political spending by corporations and unions, nonprofits like America Is Not Stupid have taken on an expanding role in U.S. elections. That’s largely because they do not have to identify their donors, unlike super PACS, leading them to be dubbed “dark money” groups.

About 150 of these nonprofits spent more than $254 million in 2012 on ads, phone calls and mailings reported to the Federal Election Commission. Almost all the donors of that money have remained anonymous. Most of that money — more than 85 percent — was spent by conservative groups, according to the Center for Responsive Politics and research by ProPublica.

These groups are allowed to spend limited amounts to influence elections, as long as they can prove their primary purpose is “social welfare.” But ProPublica has shown how dozens of social welfare nonprofits have underreported their political spending, or spent money on elections despite telling the IRS they would not do so.

In its 2012 annual work plan, the IRS recognized the problem, announcing it would take a hard look at nonprofits and “serious allegations of impermissible political intervention.”

If the agency’s exchanges with America Is Not Stupid and A Better America Now are any indication, however, the augmented focus on nonprofits has been less than ferocious.

The IRS sent ProPublica the groups’ applications for recognition last November, even though they had not yet been recognized and the documents were therefore not supposed to be made public. We wrote stories about these and several other pending applications, bringing it to the IRS’ attention that these groups had pledged that they would not spend money on elections, yet did so.

According to IRS records, neither group ever amended its application to reflect its political spending.

In response to IRS questions about their applications, though, the groups acknowledged that they had spent small amounts on elections – a contradiction that apparently did not hobble their chances for recognition.

A month after receiving IRS recognition in April of this year, A Better America Now changed its story again. It filed its 2012 tax return and asserted – again, under penalty of perjury -- that it had spent no money to influence elections. ProPublica reported this in July.

The group’s president, Bob Portrie, lawyer Eugene Peek, and accounting firm LBA Group, all out of Florida, did not return calls and emails for comment.

The IRS told ProPublica that the 2012 tax return for America Is Not Stupid was “unavailable” as of last month. Renae Duncan, the group’s certified public accountant in Texas, said she would pass on an inquiry from ProPublica to Miguel A. Gutierrez, the group’s president, on Monday morning. He has not yet responded.

In replying this May to IRS questions on America Is Not Stupid’s application, Gutierrez provided several examples of the group’s activities as proof that it had a bona fide social welfare mission of improving the good of a community — the critical factor in maintaining tax-exempt status.

He said the group had created a website, www.NewsEagle360.com, and had authored articles “regarding how underserved communities or minority populations and economically disadvantaged small businesses may be affected by certain U.S. federal rules and regulations in the coming years.” There’s no sign of any such articles on the website or elsewhere, however. (On Monday, one of the website’s top stories was on “CoralActives: Breakthrough Acne Skin Care.”)

To showcase the group’s “educational content,” Gutierrez pointed to the main website for America Is Not Stupid, a single page with 156 words on it.

He told the IRS that the nonprofit conducted polls in Montana, Nevada and Texas, targeting heads of households with Hispanic surnames. But the only poll included in the response didn’t mention Latinos at all. Instead, it asked Montanans about which candidates they planned to vote for in the 2012 election.

The group’s president also said the group held events, including one in San Antonio to “openly discuss topics affecting the Hispanic population in the U.S., including, but not limited to, healthcare, the housing market, jobs and the economy, and various education issues.”

Gutierrez said the event was held on Oct. 26 — just before the 2012 election. The event was free for the first 3,000 people, and billed to the public as strictly entertainment, an evening featuring comedian Paul Rodriguez and the Leslie Lugo Band playing music “to dance into the night.”

But former Bush official Hector Barreto gave the keynote address, Gutierrez told the IRS. One detail America Is Not Stupid didn’t mention: Barreto also happened to be the co-chair of Juntos Con Romney, Republican presidential candidate Mitt Romney’s Hispanic steering committee.

Nothing Gutierrez said in his May 24 response to the IRS seems to have raised any red flags with the IRS, however.

A month after receiving it, the IRS recognized America Is Not Stupid.

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