The "Swiss Bank Accounts" of the 2012 Elections: How Secret Donors Are Corrupting Democracy

The corrosive influence of money in politics was amplified in 2012 by the fact that in many cases we don't know which individuals or which corporations actually provided much of the funding to affect election results. "Dark money" -- election spending where we don't know the source of the funds -- played a bigger role in 2012 than in any other presidential election since Richard Nixon's.

A new report [3] from the Center for Media and Democracy and the U.S. Public Interest Research Group (USPIRG) has helped expose more about what we call "the swiss bank account" of American elections, where wealthy elites attempt to secretly influence the outcome of our elections through non-profit groups that keep their donations hidden, and increasingly, through "straw" or "shell" corporations that appear to exist for no reason other than to anonymously pour millions into elections.

Dark Money Nonprofits Reported Spending $299 Million, but Certainly Spent More

Voters could discover the actual funders behind just two-thirds of all election spending reported to the Federal Elections Commission. But when non-reported spending is tallied, the level of secrecy becomes even more extreme.

The reason we don't know the complete totals for secret money is because nonprofits largely ran so-called "issue ads," and spending on these ads need only be reported to the FEC when aired just before primaries or election day. Nonprofits that do not disclose their donors reported spending about $300 million in 2012, but the total is certainly much higher. Crossroads GPS, for example, told the FEC that it spent just under $71 million on the 2012 elections, but a review of its press releases since 2011 indicates it actually spent more than twice as much as was reported, topping at least $165 million.

This means that secrecy was not only an issue with respect to the sources of a group's funding, but also when it came to reporting the dollars that they spent.

Additionally, these tax-exempt non-profits are not supposed to have electoral intervention as a primary activity, so in the post-election period may use activities like lobbying as an accounting trick to balance their books between electoral and non-electoral spending. And their lobbying clout is likely increased by the fact that, come election time, they can back an unresponsive politician's opponent in the primaries. This leads to an escalating cycle of non-stop campaigning and special interest influence, but with zero transparency or public accountability.

Shell Corporations Funneled $17 Million to Super PACs

Super PACs, on the other hand, must disclose the identities of their funders, and must report all of their expenditures. But some donors sidestepped these transparency rules by forming "shell corporations," which are incorporated as for-profit businesses but don't appear to engage in any commerce. At least $17 million in secret dollars were funneled to Super PACs by way of these shell corporations, according to the report.

For example, at least $12 million was funneled to the FreedomWorks for America Super PAC through two shell corporations, both of which were formed just before the donations were made, and neither of which appear to do any legitimate business.

Of all Super PAC donations from business corporations, at least seventeen percent came from shell corporations that appear to have been formed for no reason other than to filter money into elections, and to keep the true sources of the funds secret.

Huge Problems with Secrecy

There are three main reasons why this level of secrecy is bad for our democracy.

First, not knowing the source of this spending makes it nearly impossible to assess whether a donor's secret "investment" in support of a candidate pays off through favorable policy, which shields both elected officials and donors from public accountability. Even though the American public is unaware of the sources of a dark money group's funding, there is nothing keeping donors from making their identities clear to the politicians benefiting from this spending. And those donors likely expect a return on their investment.

Second, not knowing which interests are backing or opposing specific candidates limits the ability of voters to assess those messages, or assess a candidate for that matter. In Montana, for example, a nonprofit called Montana Hunters and Anglers Action bought ads supporting the libertarian candidate, calling him the "true conservative." But Montana voters never knew who was behind the group or who funded the ads. An investigation by ProPublica found that Montana Hunters and Anglers Action has ties to Democrats, suggesting the group's true motivation was to siphon votes away from the Republican candidate rather than to support the libertarian.

Third, transparency in election spending allows us to identify violations of the law and deter those violations from happening in the first place. Though many campaign finance laws have been eviscerated in the post-Citizens United world, foreign corporations and individuals are still barred from spending to influence American elections. And it is entirely possible that foreign dollars are coming into elections by way of these nonprofits and shell corporations. A foreign donor could set up a sham corporation in Delaware, fill it with cash, have it spend to support the desired candidate, and then disband or go silent. Foreign donors could also give to a dark money nonprofit and the public would never know. The IRS almost never looks into whether a donor is actually American, unless there is a request for investigation from a watchdog group. And watchdogs can only identify a discrepancy if there is public reporting.

Citizens United Opened Floodgates, but Supported Disclosure

The many billions spent in 2012 are largely attributable to the U.S. Supreme Court decision in Citizens United.

But, Justice Kennedy and the four other justices in the Citizens United majority affirmed the long-standing notion that the public has a right to know who is spending money to influence elections.

The justices got a lot wrong in Citizens United, but their position on transparency demonstrates that reforms to mandate disclosure of the sources of money in politics are constitutionally sound and supported by legal precedent.

We need a 28th amendment to overturn Citizens United and to limit political spending. But until that happens there are multiple reforms that can and should be enacted to shine some sunlight on election spending, which can limit some of the abuses we've seen in the past year that have kept donors secret and left voters in the dark:

the IRS should create clearer rules for what constitutes political intervention to help resolve ambiguities that have been exploited by dark money non-profits in the post-Citizens United world.
Congress should tighten limits on how much a non-profit can participate in political activity. Ambiguity under current law has led many non-profits to assert they can spend up to half of their total activities or expenditures on politics, which the IRS has neither refuted nor clearly supported.
Congress should expand the reporting window for "issue ads" to Jan 1 in non-Presidential election years and one year before the election in Presidential years. Under our current system, where we are basically in a permanent political campaign, the narrow reporting window does not adequately capture the efforts to influence our vote and impact elections.
To ensure that secretive donors don't shift their funding to shell corporations in response to new transparency requirements, States should require all private corporations to list their true owners (known as the "beneficial owners") upon incorporation and make that information readily available on the public record. Congress should require that Super PACs and dark money groups that intend to spend on the election collect and report information on the "beneficial owner" of all private corporate donors.

Regardless of the election results, the amount of secretive spending in this past election shows that the integrity of our democracy is being threatened, and we must take bold steps to restore the primacy of voters in our elections.

TAKE ACTION: Click here [4] to ask your U.S. Senator to investigate the secret money that tainted the 2012 elections and to subpoena the Koch brothers and others involved in the big money game.

LEARN MORE: Read the full "Elections Confidential" report from CMD and USPIRG here [3].