Comeback for ‘legalized money laundering’ in party politics?

Introduction

In 2003, Sen. John McCain declared the federal government’s ban on “soft money” — the unlimited cash donors showered on national political parties — a “victory for the people of America and democracy.”

McCain was ecstatic: Legislation he championed to reduce the influence of money in politics had just withstood a Supreme Court challenge. And the Arizona Republican prevailed after having enlisted members of both parties in his crusade.

But a new Center for Public Integrity analysis of campaign finance data indicates Democrats and Republicans alike are now aggressively trafficking in a new — and perfectly legal — kind of soft money, enabled by a 2014 Supreme Court decision, the latest in a series gutting major parts of McCain’s 2002 law.

The new tactic is also changing political fundamentals.

In a fundraising environment that had come to be dominated by super PACs — committees that may raise and spend unlimited amounts of money to advocate for or against specific candidates — it’s helping national political parties regain some relevancy after years of declining power. It’s also reviving an era when politicians were able to directly solicit six- and seven-figure checks from donors on behalf of the political parties, raising the specter of corruption and scandals that dogged politicos during the 1990s.

Here’s how this shell game works: Top donors spent the 2016 election cycle legally writing six-figure checks to so-called joint fundraising committees — committees that can dole their contributions out to multiple allies, notably including state political parties.

But rather than keep all the cash, the state parties have been quickly steering the money to the national parties, taking advantage of their ability to transfer unlimited cash to their national affiliates.

The joint fundraising vehicles aren’t new, but the Supreme Court’s 2014 decision to eliminate some obscure but important campaign contribution limits in McCutcheon v. Federal Election Commission had the effect of supercharging them. The 2016 election provided a first, full glimpse at what the new legal landscape would mean in reality.

The result: Parties are more aggressively and successfully courting a small number of deep-pocketed donors, giving the wealthy another way to exert their ever-growing influence over politics. And the national parties, which had lost their luster as deep-pocketed donors steered their money to other vehicles, are once again flush with burgeoning amounts of cash whose origins can be difficult to divine.

Foes of McCain’s effort to restrict political giving welcome the changes. But nonpartisan watchdog groups aren’t happy. The situation is “effectively a form of legalized money laundering and it is something that we’ve seen on both sides,” says Brendan Fischer of the Campaign Legal Center.

Working the system

Both Donald Trump and Hillary Clinton took great advantage of this latter-day soft money system as they barreled toward Election Day, the Center for Public Integrity’s review shows.

When, for example, Clinton’s main joint fundraising committee received a contribution, it divvied the money up among Clinton’s campaign committee, the Democratic National Committee and a gaggle of state-level Democratic party committees.

State Democratic parties then often shifted the money they received from Clinton’s joint fundraising committee right to the Democratic National Committee, allowing the national committee to pocket significantly more cash than federal contribution limits would appear to allow.

Republicans did the same, an even higher percentage of the time: Republican state parties shifted more than 90 percent of the dollars they received from the Trump Victory committee to the Republican National Committee.

In the post-McCutcheon world, this fundraising tactic has vaulted joint fundraising committees out of obscurity and enshrined them as prominent players in federal politics.

During the 2016 election cycle, for example, Clinton’s joint fundraising committee took in over $300 million more than Barack Obama’s did during the 2008 election cycle, when he was the Democratic nominee.

The new reality has also pushed national parties to court — even more assertively than before — a small cohort of donors who can write them huge checks.

During the 2016 election cycle, at least 1,700 donors each spread $127,000 or more among federal candidates, party committees and political action committees, the Center for Public Integrity’s analysis of campaign finance data from the Center for Responsive Politics found. The $127,000 figure (adjusted to current dollars) is significant because it represents the so-called aggregate cap, or limit on the amount donors could give all federal candidates, political parties and political action committees combined, that was struck down by McCutcheon.

Combined, that small universe of megadonors injected more than $500 million into federal-level elections in 2016, and slightly more than half of that money was in contributions that would not have been legally permitted before the McCutcheon v. FEC decision, when the aggregate caps were still in place.

Some donors in previous cycles exceeded the limits, despite the law, but the change has funneled hundreds of millions of additional dollars into federal elections, much of it into party coffers. During the 2012 presidential election cycle, only about $16 million went over the limits.

The total includes contributions to new accounts Congress created for the parties in December 2014, after the McCutcheon v. FEC decision. Those accounts can accept six-figure contributions, but the money is earmarked for restricted purposes such as convention costs or recount expenses.

The RNC did not respond to requests for comment. The DNC “complied with all FEC requirements,” says spokesman Michael Tyler.

But in a May 2016 email exchange among top Democratic party officials and their lawyers, released by WikiLeaks, they acknowledged that any formal agreement between state parties and the national party to transfer the money “would raise serious legal question for the DNC.” (The email was prompted by media coverage of some transfers.)

Instead, the Democrats said, the party should stress there is “definitely no formal agreement or obligation” requiring the transfers, even though “in practice” state parties, the DNC and the Clinton campaign would move the money where “it will be the most useful.”

How it works

Contributions to Trump’s campaign machine by Julianna Holt, chairwoman of the NBA’s San Antonio Spurs, show how the nation’s new soft money system works — and how it makes a mockery of campaign finance law.

Holt wrote checks totaling $499,400 in 2016 to the Trump Victory Committee, Trump’s main joint fundraising committee benefitting his presidential campaign and Republicans writ large. Of Holt’s contribution, Trump’s own campaign received $5,400 — the legal maximum for a presidential committee.

The Republican National Committee, meanwhile, received $284,000, split among its general account and several restricted accounts that fund specific projects, such as national conventions or election recounts.

Finally, 20 state Republican parties reported receiving $10,000 each from Holt, via her original contribution to Trump’s joint fundraising committee.

But of these 20 state parties, 18 of them held the money only briefly before transferring it to the RNC. The state parties did this by exploiting a law that allows them to transfer unlimited amounts of money to their national party committee cousins.

In the end, the transfers from the state parties meant the RNC pulled in an additional $180,000 from Holt. (Holt didn’t respond to an inquiry from the Center for Public Integrity about her contributions and how they were used.)

Hundreds of other Trump Victory Committee donors had their big-dollar donations used in similar fashion. In all, state Republican parties transferred nearly every dollar they received from the Trump Victory Committee to the RNC — more than $27 million from the committee’s formation in May 2016 to the end of that year, according to the Center for Public Integrity’s analysis.

One state party chairwoman, Terry Lathan of the Alabama Republican Party, said the RNC made it clear to her that the Trump Victory Fund would be sending her state party committee money — and she knew most of it would go to the RNC.

“That was perfectly fine,” Lathan said. “We wanted to be team players to help in a presidential election year.”

On the Democratic side, donors contributing to the Hillary Victory Fund — and thereby eventually filling the Democratic National Committee’s coffers with bonus cash — included Illinois venture capitalist J.B. Pritzker, media mogul Fred Eychaner and former Dreamworks SKG CEO Jeffrey Katzenberg.

Democratic state parties pocketed about one-fourth of the money they received from Clinton’s joint fundraising committee. But they sent the other three-fourths — at least $84 million — to the DNC.

Seth Masket, chairman of the political science department of the University of Denver, notes that political parties have always found innovative ways of adapting their fundraising practices. Often, he says, “reforms are designed to kind of limit their ability to transfer around money or spend money on campaigns and usually parties are very skilled at finding new ways at getting that money to candidates who need them in competitive districts.”

In an unusual move, the Hillary Victory Fund itself spent some proceeds on advertisements designed to boost Clinton’s campaign. This novel use of political money worried watchdogs who said it effectively violated federal campaign contribution limits by shifting Clinton’s own campaign costs onto groups funded by donors writing six-and-seven-figure checks. (By law, 2016 presidential campaign committees could only accept contributions of up to $2,700 per election, per person.)

More than two dozen Democratic state parties did not respond to a request for comment from the Center for Public Integrity regarding their transfers to the DNC.

‘Like pinball’

The 2016 election’s tangled web of soft money transfers makes following political money — often a daunting task even for election lawyers and political reporters — that much more difficult. And that makes it hard for voters to understand what interests are behind the political ads they’re seeing on television, or assess the full influence of a big donor.

The dollars given to the joint fundraising committees ricocheted around “like pinball,” says Daniel Weiner, senior counsel for the Brennan Center for Justice at New York University School of Law, which advocates for campaign finance reform.

But other campaign finance lawyers noted that the transfers, while confusing, represent fundraising coordination between state and national parties — something that’s perfectly permissible and to be expected during the heat of an election season.

Besides, as pro-deregulation campaign finance lawyer Jim Bopp notes, the national parties transfer money “to the states that matter” closer to Election Day, and those critical states then use the money locally.

When Congress passed McCain’s 2002 law, it was responding to public backlash after a series of scandals that showed the growing influence of corporations, labor unions and big donors writing big checks. Now, campaign finance watchdogs say, the pre-2002 system is essentially back as a result of McCutcheon v. FEC, the 2014 Supreme Court ruling that allowed wealthy Americans to contribute money to as many different federal candidates and political parties as they want. Previously, their overall contributions were capped each election cycle under the “aggregate limit” rule.

The decision didn’t change the base limits that contributors can give to each candidate or political party, but essentially allows donors to give to more recipients than they could before McCutcheon v. FEC.

Individuals had been prohibited from giving more than $48,600 combined to all federal candidates and more than $74,600 combined to all parties and political action committees. That meant that per election cycle, contributors weren’t allowed to give more than $123,200 (though campaign finance data suggests some contributors slipped past that limit).

Campaign finance watchdogs warned before McCutcheon v. FEC was decided that it would create a loophole allowing donors to circumvent base contribution limits. The amounts of money involved likely will only grow as joint fundraising committees get bigger.

But supporters of the aggregate limits said, among other things, that the limits prevented donors from circumventing base campaign contribution limits by giving money to other political committees that then transferred it, or used it to support a particular candidate. The Supreme Court found that argument to be insufficient and struck down the limits.

Justice John Roberts wrote it was “divorced from reality” to think the resulting river of cash would be funneled to benefit a single candidate. There are enough legal safeguards in place without the aggregate limits, Roberts argued, to ensure that donors don’t violate the base limits. He also said there were strong First Amendment considerations arguing against the aggregate caps, writing, “The Government may no more restrict how many candidates or causes a donor may support than it may tell a newspaper how many candidates it may endorse.”

What Roberts didn’t predict: The money would flow to the national political parties in amounts not seen since the heyday of soft money, when politicians such as McCain and George W. Bush were fighting over how to address it.

There is one key difference between today’s system and the soft-money era, however: Now, the dollars must be used in accordance with federal regulations, as opposed to the nebulous “party building” activities the old, unlimited soft money contributions could be spent on.

Supreme disagreement

In a blistering dissent that he read from the bench, Supreme Court Justice Stephen Breyer said Roberts and the majority were making the wrong decision in McCutcheon v. FEC.

The McCutcheon v. FEC ruling “creates a loophole that will allow a single individual to contribute millions of dollars to a political party or to a candidate’s campaign,” he wrote, adding that it “eviscerates our Nation’s campaign finance laws, leaving a remnant incapable of dealing with the grave problems of democratic legitimacy that those laws were intended to resolve.”

Now, campaign finance watchdogs say, events have proven Roberts wrong and Breyer right.

Even though the transfers are legal, the practice “drastically undermines the contribution limits, and opens the door wide for corruption to flow from deep-pocketed donors who can write huge checks to the party committees,” says Paul S. Ryan, vice president of Common Cause and formerly of the Campaign Legal Center.

The joint fundraising committees will only grow in size in coming election cycles, as more state party committees join up, observers on both sides of the debate agree. Even though they don’t get to keep the money, the state parties have little incentive not to boost the national parties’ efforts. “The donors are not coming from the state party base,” Ryan points out. “It doesn’t cost them anything, it gains them favor and it helps their party.”

But Bopp, a campaign finance lawyer who was part of the legal team involved in bringing the McCutcheon case, says the scenario taking place appears materially different than the one referenced in the McCutcheon v. FEC ruling. That’s because the cash is flowing to national parties, not a candidate.

The point of campaign limits is to avoid corruption, he says, and parties aren’t public officials. “What is different is a particular donor can give to more state parties than those they were limited to in the past,” he says, which was “the whole purpose and point of the case.”

There are some upsides to this brave new money era, political scientists allow—notably the rebuilding of political parties that had atrophied under the old rules. Parties, says Masket, exert “kind of a moderating influence on the system in that they channel most of their funds to the more centrist candidates in the more competitive district,” isolating extremists. Nonetheless, he says, the convoluted path traveled by the money “means declining accountability in the campaign finance system, which is problematic.”

“I don’t like these kinds of politics, where money is just circulating in these circuitous ways,” adds Ray La Raja, a professor of political science at the University of Massachusetts Amherst.

Political operatives see the issue in more practical terms. Alabama businessman Shaun McCutcheon, the plaintiff in the Supreme Court case that overturned the limits, says that his primary motivation was allowing individual donors to give to as many candidates and political committees as they chose.

But if the decision in the case that bears his name helps the political parties raise more money and compete with the super PACs that can raise unlimited amounts, he’s happy about that.

“That’s a good thing in my opinion,” he says. “A million in the parties is worth a billion in the super PACs. The people in the parties … know how to get a lot more out of their money than some of these super PACs.”

Chris Zubak-Skees and Iuliia Alieva contributed to this report.

This article was co-published by Politico.