D?j? Vu: Outlawed Soft Money Contributions Likely to Flow to Shadowy 527 Groups That Skirt Flawed Disclosure Law

April 9, 2002

D?j? Vu: Outlawed Soft Money Contributions Likely to Flow to Shadowy 527 Groups That Skirt Flawed Disclosure Law

Statement of Joan ClaybrookPresident, Public Citizen

Congress took a big step toward reducing the corrupting influence of money in our political system by passing the McCain-Feingold/Shays-Meehan legislation, which will stop corporations, unions and individuals from giving unlimited contributions to federal parties and officeholders.

Unfortunately, our research shows that this historic reform will be undermined if this river of money is simply diverted to shadowy and highly partisan “527” groups that use it to influence elections.

Public Citizen today is releasing a study that illustrates the problem. We call this new study “D?j? Vu Soft Money” because we?ve seen this before ? a campaign finance loophole that is exploited and stretched so much that it becomes standard operating procedure for political interests.

A big part of the problem is that the Internal Revenue Service?s disclosure system for 527s is like something out of the Flintstones era. It is incredibly weak and ineffective. And we are very concerned that the House of Representatives may vote tomorrow to further weaken it. It is outrageous that the House leadership will not permit consideration of an amendment that would prevent the opening of a huge new loophole in the new campaign finance law.

Our study focuses on the largest “non-politician 527s” ? those not controlled by members of Congress. These groups take in enormous sums of money and spend it to influence federal elections with sham “issue ads,” direct mail and phone-banking. For example, the top 25 of these groups collected $67 million in soft money in 18 months ? compared to $63 million raised by the Democratic Senatorial Campaign Committee during the entire 1999-2000 election.

But 527 groups are not the problem per se. The problem is that these highly partisan groups are likely to attract even more soft money in the post-reform era. And that is troubling because they already operate in a shadowy world of limited disclosure, limited scrutiny and lax enforcement.

The IRS disclosure system is so flawed that you can?t even the system for a contributor like Enron ? and you can?t be sure of finding all of Enron?s 527 contributions unless you open the electronic folders of more than 14,800 different groups.

These groups evade full disclosure by failing to file entire reports, by failing to disclose the occupations and employers of donors, and by failing to identify their connections to federal parties and politicians.

And they get away with it. The IRS has not taken a single enforcement action against a 527 group. In fact, it?s been almost two years after the IRS created the disclosure system and the agency still doesn?t have a compliance program in place. Let me make that clear: The IRS doesn?t even know who is complying with the law and who is breaking it.

In such a wild-West environment, it?s all too easy to envision politicians and party officials illegally steering their former soft money donors to these partisan 527 vehicles, turning them into undisclosed front groups for various political interests.

During previous debates over campaign finance reform, opponents argued that rather than ban soft money, we should just require greater disclosure of who puts money into the system and where it goes. But now we see a misguided effort by some of these same politicians to relax what little disclosure we have for 527s. That?s what a provision in H.R. 3991 ? a bill expected to go to the House floor on Wednesday ? will do.

Let me point to some graphic illustrations of current problems in the 527-disclosure system:

The IRS does not require electronic disclosure reports, so the 527 reports must be manually entered into the IRS?s Web-based system. This creates delay and allows for human errors. Many human errors ? which makes it hard to find 527 groups, never mind track their activities.

For instance, you?ll see in one graphic that the IRS took a group called “Working Families Party” ? a coalition of labor and community groups active in New York politics ? and turned it into something the “Worthing Fam.” This is significant because you could not find any details about the Working Families Party unless you somehow knew to search the IRS system for “Worthing.”

Similarly, you?ll see another illustration of how unpredictable the IRS system can be. In this case the IRS took repeated statements that the 527 law “does not apply” to a particular organization from Florida and created a phantom 527 group called “Does Not Apply.”

There are many other such examples ? look for yourself ? and we will be glad to point them out to you.

Another problem is the staggering degree to which 527 groups fail to disclose identifying details about their donors. Our study found that the top 527 groups failed to disclose occupation and employer information for about 67 percent of all large donors ? and you know how important such information can be to determining the purpose of a political contribution. One group, the Republican Leadership Coalition, did not disclose such information for a single one of its 2,019 itemized individual contributors.

Such contempuous defiance of the law underscores the utter lack of oversight and enforcement by the IRS. How else to explain the fact that a group could collect $2.8 million in 12 months and not disclose the occupation of a single donor?

Finally, let me point to one other graphic. That is the one that shows Jane Fonda contributing $11.7 million to one 527 group ? in two days in late September 2000. I find it amusing that Rep. Thomas, one of the most conservative members of the House, favors a system that will allow Jane Fonda?s contributions to escape public scrutiny.

I like Jane Fonda. And I don?t mean to single her out for criticism. But this graphic shows how one person, or one corporation, or one union can drop an enormous amount of money into this murky 527 system and have an enormous influence on an election process.

Such huge contributions are entirely legal in the 527 system. So be it. But the last thing we need to do in such a system is weaken disclosure requirements. In fact, we need to tighten them. That is what our new report shows ? and it includes several specific policy recommendations that we believe are needed. These are in the opposite direction of what is being proposed by Rep. Bill Thomas tomorrow on the House floor. Our recommendations include:

  • The IRS should create a fully searchable database ? modeled on the FEC system for campaign contributions ? that would allow the public to search for groups? names, location, directors, related entities, contributors and recipients of 527 spending.
  • Congress should require active 527 groups to file electronic disclosure reports.
  • Congress should require that the purpose of each expenditure be stated and that groups list the dates of contributions and expenditures.
  • The IRS should review each disclosure report for accuracy and completeness and use its authority to levy fines as part of the enforcement and compliance processes
  • The FEC should develop criteria for investigating 527s that may be surrogates for illegal soft money fundraising, or may be coordinating with the fundraising activities of federal politicians.

Now I would like to turn the floor over to our distinguished guests.

Thank you