[Senate Hearing 113-301]
[From the U.S. Government Publishing Office]
S. Hrg. 113-301
CURRENT ISSUES IN CAMPAIGN FINANCE LAW ENFORCEMENT
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HEARING
before the
SUBCOMMITTEE ON CRIME AND TERRORISM
of the
COMMITTEE ON THE JUDICIARY
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
APRIL 9, 2013
__________
Serial No. J-113-12
__________
Printed for the use of the Committee on the Judiciary
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COMMITTEE ON THE JUDICIARY
PATRICK J. LEAHY, Vermont, Chairman
DIANNE FEINSTEIN, California CHUCK GRASSLEY, Iowa, Ranking
CHUCK SCHUMER, New York Member
DICK DURBIN, Illinois ORRIN G. HATCH, Utah
SHELDON WHITEHOUSE, Rhode Island JEFF SESSIONS, Alabama
AMY KLOBUCHAR, Minnesota LINDSEY GRAHAM, South Carolina
AL FRANKEN, Minnesota JOHN CORNYN, Texas
CHRISTOPHER A. COONS, Delaware MICHAEL S. LEE, Utah
RICHARD BLUMENTHAL, Connecticut TED CRUZ, Texas
MAZIE HIRONO, Hawaii JEFF FLAKE, Arizona
Bruce A. Cohen, Chief Counsel and Staff Director
David Young, Republican Chief of Staff
------
Subcommittee on Crime and Terrorism
SHELDON WHITEHOUSE, Rhode Island, Chairman
DIANNE FEINSTEIN, California LINDSEY GRAHAM, South Carolina
CHUCK SCHUMER, New York TED CRUZ, Texas
DICK DURBIN, Illinois JEFF SESSIONS, Alabama
AMY KLOBUCHAR, Minnesota MICHAEL S. LEE, Utah
Stephen Lilly, Democratic Chief Counsel
Sergio Sarkany, Republican Chief Counsel
C O N T E N T S
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STATEMENTS OF COMMITTEE MEMBERS
Page
Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode
Island......................................................... 1
Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont,
prepared statement............................................. 34
Cornyn, Hon. John, a U.S. Senator from the State of Texas,
prepared statement............................................. 36
WITNESSES
Witness List..................................................... 33
Raman, Mythili, Acting Assistant Attorney General, Criminal
Division, U.S. Department of Justice, Washington, DC........... 4
prepared statement........................................... 37
Haynes, Patricia, Deputy Chief, Criminal Investigation, Internal
Revenue Service, Washington, DC................................ 6
prepared statement........................................... 42
Noble, Larence M., President and Chief Executive Officer,
Americans for Campaign Reform, Washington, DC.................. 17
prepared statement........................................... 48
Colvin, Gregory L., Principal, Adler & Colvin, San Francisco,
California..................................................... 19
prepared statement........................................... 55
Smith, Bradley A., Chairman, Center for Competitive Politics,
Josiah H. Blackmore II/Shirley M. Nault, Professor of Law,
Capital University Law School, Columbus, Ohio.................. 21
prepared statement........................................... 68
QUESTIONS
Questions submitted by Senator Amy Klobuchar for Mythili Raman,
Patricia Haynes, Lawrence M. Noble, Gregory L. Colvin, and
Bradley A. Smith............................................... 88
Questions submitted by Senator Charles Schumer for Mythili Raman
and Patricia Haynes............................................ 89
ANSWERS
Responses of Mythili Raman to questions submitted by Senators
Schumer and Klobuchar.......................................... 91
Responses of Patricia Haynes to questions submitted by Senators
Schumer and Klobuchar.......................................... 96
Responses of Lawrence M. Noble to questions submitted by Senator
Klobuchar...................................................... 97
Responses of Gregory L. Colvin to questions submitted by Senator
Klobuchar...................................................... 101
Responses of Bradley A. Smith to questions submitted by Senator
Klobuchar...................................................... 105
MISCELLANEOUS SUBMISSIONS FOR THE RECORD
March 22, 2012, lettter to IRS................................... 117
American Civil Liberties Union (ACLU), Laura W. Murphy, Director,
Washington Legislative Office, Washington, DC, April 9, 2013,
letter......................................................... 121
Democracy 21, Fred Wertheimer, President, Washington, DC,
statement...................................................... 126
ADDITIONAL SUBMISSIONS FOR THE RECORD
Submissions for the record not printed due to voluminous nature,
previously printed by an agency of the Federal Government, or
other criteria determined by the Committee, list............... 130
Petition for rulemaking on campaign activities by section
501(c)(4)......................................................
http://www.democracy21.org/uploads/
D21_and_CLC_Petition_to_IRS_7_27_2011.pdf.................. 130
Democracy 21 report: leading presidential-candidate super
PACs http://www.democracy21.org/uploads/
Democracy_21_Super_PAC_Report_1_4_2012.pdf................. 130
``The FEC: The Failure to Enforce Commission'' by Fred
Wertheimer and Don Simon http://www.acslaw.org/sites/
default/files/Wertheimer_and_Simon--The Failure to Enforce
Commission.pdf............................................. 130
CURRENT ISSUES IN CAMPAIGN FINANCE LAW ENFORCEMENT
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TUESDAY, APRIL 9, 2013
U.S. Senate,
Subcommittee on Crime and Terrorism,
Committee on the Judiciary,
Washington, DC
The Subcommittee met, pursuant to notice, at 10:02 a.m., in
Room SD-226, Dirksen Senate Office Building, Hon. Sheldon
Whitehouse, Chairman of the Subcommittee, presiding.
Present: Senators Whitehouse, Feinstein, Schumer, Durbin,
Klobuchar, Graham, Cruz, Sessions, and Lee.
OPENING STATEMENT OF HON. SHELDON WHITEHOUSE, A U.S. SENATOR
FROM THE STATE OF RHODE ISLAND
Chairman Whitehouse. Good morning. The hearing will come to
order. I appreciate the witnesses being here, and the order of
proceeding will be that any Senators who are present before the
testimony will be invited to make any opening statement that
they care to make. We will take the testimony from these
witnesses and then have a question-and-answer session, and I
think we will start with seven-minute rounds. It does not
appear, given everything that is going on in the Senate today,
that we are going to have a great number of Senators here, so I
think we can go with seven-minute rounds. And we will switch
then to the other panel and continue the same way, and we have
to be done at noon. So I appreciate the witnesses who are here,
and I will lead with my opening statement.
In a country of laws, when the laws are made a mockery, it
is a serious matter. This hearing will explore the mockery our
campaign finance laws have become, with particular emphasis on
what appears to be flagrantly false statements made with
impunity in official documents.
We note Section 1001 of the U.S. Criminal Code, which makes
it a criminal offense to make ``any materially false,
fictitious, or fraudulent statement or representation'' in
official business with the government, and Section 7206 of the
Internal Revenue Code, which makes it a crime to willfully make
a false material statement on a tax document filed under
penalty of perjury.
The false statements we look at relate, among other things,
to Section 501(c)(4) of the Tax Code, which gives nonprofit
status to entities that are ``operated exclusively to promote
social welfare.'' This promotion of social welfare is
specifically forbidden to include direct or indirect
participation or intervention in political campaigns on behalf
of or in opposition to any candidate for public office. It
seems clear enough.
But after the Supreme Court opened the floodgates to big
money in elections in its disgraceful Citizens United decision,
big donors like to use these nonprofit entities to launder
campaign spending and hide their identities. As the head of one
such nonprofit admitted, for big donors ``the anonymity was
appealing.''
So the tax filings then begin to get creative. There are
several areas of mischief: discrepancies in reporting to the
IRS and to the FEC; discrepancies between reported and actual
political activity; characterizing political TV ads as
``educational activities'' or ``legislative activities'';
characterizing as ``nonpolitical'' donations made to other
groups that then spend it on political advertising; and
disbanding and reforming under other names before the reporting
is due for the disbanded organization.
The responsible federal agencies, primarily the IRS and
DOJ, appear somewhat complicit in the mockery that is made of
these tax laws. The DOJ maintains a policy of deference to the
IRS and does not investigate or prosecute false statements in
campaign finance tax reporting without a case having been
brought to it by the IRS. As we will hear from some of the
witnesses, this creates problems. DOJ maintains this policy
despite 18 U.S.C. 1001, the well-known law against false
statements that spans all federal agencies in addition to the
false statements law specific to tax filings.
The IRS on its part is an organization as to which,
according to press reports quoting its own previous Director of
Nonprofit Organizations, and I quote here, ``Chasing political
nonprofits isn't the organization's primary function, nor one
for which it is staffed.'' Thus, from a systems point of view,
we have DOJ deferring for enforcement to an effectively
toothless organization, with the predictable result that zero
cases appear to have been brought. Indeed, as far as I know,
not one person has been put before an investigative grand jury.
To make matters worse, the IRS has taken one of the clearer
statutes passed by Congress and through its regulations has so
defanged and confused the law as to make it virtually
unenforceable by the agency. The IRS did this by saying that
``exclusively''--the word in the statute--meant ``primarily''
by then accepting that ``primarily'' meant 51 percent, and
further by pursuing a policy of conspicuous nonenforcement even
of that watered-down standard.
If the IRS has affirmatively wished to defeat this law and
permit rampant false statements to go unpunished, it could
hardly have done a better job. As a Notre Dame law professor
who specializes in this area has said, ``the IRS seems to blink
if you push them.'' And yet DOJ defers to the IRS.
The result is that statements that are plainly false by any
common lay definition of the term ``go unpunished.'' A clear
congressional statute goes unenforced. An industry that
launders immense amounts of anonymous money into our elections
grows like a weed. And in politics, only the big donors and the
candidates and their intermediaries know who is beholden to
whom and for how much.
As Senator McCain and I pointed out in a brief to the
Supreme Court recently, this latter condition is a prescription
for corruption. As even the Supreme Court pointed out in
Citizens United, it is disclosure of donors' identities that
allows ``citizens to hold corporations and elected officials
accountable for their positions and supporters'' so that
citizens can ``see whether elected officials are in the pocket
of so-called monied interests.''
And, of course, under this regime, nothing prevents foreign
interests from influencing American elections if there is no
investigation and no enforcement of whose money is really
hiding behind the nondisclosure provisions that gives Section
501(c)(4) its appeal to big donors.
The relevant federal IRS form includes Question 15, which
asks, under penalty of perjury, ``Has the organization spent or
does it plan to spend any money attempting to influence the
selection, nomination, election, or appointment of any person
to any Federal, State, or local public office or to an office
in any political organization? '' In one investigation,
ProPublica found 32 organizations that answered no to this
question and then went out and spent money on political races.
And that was out of 72 IRS filings they reviewed. Nearly half
appear to be false. Some organizations had ads running on the
day they mailed their filings in. Some had run them before.
Many spent millions on political ads.
Looked at the other way, in the ProPublica investigation
they found 104 organizations that told State or federal
elections officials they had spent money on candidates'
specific political ads, what the FEC called ``electioneering
communications.'' Thirty-two of those 104 had told the IRS they
had spent no money to influence elections.
Even when information is provided, it may be false. One
organization said it would spend 50 percent of its effort on a
Web site and 30 percent on conferences. Investigations showed
its Web site consistent of one photograph and one paragraph,
and no sign of any conferences. The same group declared it
would take contributions from individuals only and then took $2
million from PhRMA, the pharmaceutical lobby.
Another declared to the IRS that it spent $5 million on
political activities, but told the FEC it has spent $19 million
on political ads. Another pledged its political spending would
be limited in amount and will not constitute the organizations
primary purpose, and then went out and spent $70 million on ads
and robo-calls in one election season.
And some never even apply. They just start spending and
file a tax return after the fact, potentially as their last act
before they disband so they are gone before the mail brings
their filing to the IRS.
One never filed at all, even after the fact. No enforcement
action has been taken as far as I know.
As Melanie Sloan, executive director of CREW, has said,
``You can go into business and violate the law and then go out
of business. And what is ever going to happen about that? There
is no consequence.''
Let me close on this issue by reading from an article
describing the reaction of a State election official: ``When
ProPublica read the group's description of its activities on
its IRS application to Ann Ravel, the chairwoman of the
California Fair Elections Commission, she laughed. `Wow,' she
said, upon hearing that the group said it would not try to
influence elections. `That is simply false.' ''
So this hearing is directed to the mechanisms and
machinations by which such false statements are allowed to go
unpunished. During this hearing we will also examine
enforcement issues pertaining to coordination between
candidates and outside groups where the FEC has so weakened the
limitations as to make so-called independent expenditures
functionally equivalent to campaign contributions, also the use
of shell corporations to hide donor identities, and the risk of
foreign money influencing our elections that comes with secret
fundraising and spending by 501(c)(4)s and other groups.
I look forward to hearing from the witnesses on these and
other issues. I see that Senator Cruz has joined us, and I
invite him to make any opening statement he cares to make at
this time.
Senator Cruz. I am happy at this point just to hear from
the witnesses.
Chairman Whitehouse. Very good. Let me introduce both
witnesses.
Mythili Raman is Acting Assistant Attorney General for the
Criminal Division of the Department of Justice. In this role,
Ms. Raman oversees nearly 600 attorneys who prosecute federal
criminal cases across the country. Previously, Ms. Raman was
the Principal Deputy Assistant Attorney General for the
Criminal Division. Ms. Raman has been with the Department since
1996 and previously served as an Assistant United States
Attorney in the U.S. Attorney's Office for the District of
Maryland.
Patricia J. Haynes is the IRS Deputy Chief of Criminal
Investigation. In this role, Ms. Haynes directs worldwide
programs for investigating potential criminal violations of the
Internal Revenue Code and related financial crimes. Previously,
Ms. Haynes was the Executive Director of Investigative and
Enforcement Operations, and before that Director of Field
Operations for the Southeast Area. She began her career as a
special agent in Virginia in 1983.
If I could ask the two witnesses to stand and be sworn, we
will begin the hearing. Do you affirm that the testimony you
are about to give before the Committee will be the truth, the
whole truth, and nothing but the truth, so help you God?
Ms. Raman. I do.
Ms. Haynes. I do.
Chairman Whitehouse. Thank you very much.
Ms. Raman, welcome. We will begin with you. Thank you very
much for being here on the part of the Department of Justice.
STATEMENT OF MYTHILI RAMAN, ACTING ASSISTANT ATTORNEY GENERAL,
CRIMINAL DIVISION, U.S. DEPARTMENT OF JUSTICE, WASHINGTON, DC
Ms. Raman. Chairman Whitehouse and distinguished Members of
the Subcommittee, thank you for----
Chairman Whitehouse. Is your microphone on?
Ms. Raman. Let me start again.
Chairman Whitehouse. Before you start again, let me just
make clear that for those who have prepared testimony, your
entire testimony will be included in the record. We do call on
our witnesses to restrict their presentations in terms of time
here, but the full statement becomes a part of the record of
the proceeding.
Again, Ms. Raman, thank you.
Ms. Raman. Thank you very much. Thank you, Chairman
Whitehouse and distinguished Members of the Subcommittee. Thank
you for inviting me here today to share the views of the
Department of Justice on challenges to the criminal enforcement
of our campaign finance laws posed by the growing activity of
super PACs and certain 501(c) organizations. I am honored to
represent the Department at this hearing and to have the
opportunity to oversee the important work of the Criminal
Division.
Protecting the integrity of our elections is one of the
Department's most important tasks, and enforcement of our
campaign finance laws is a top priority. There is no question
that private contributions to political campaigns are a
fundamental part of the electoral process and that, under the
Constitution, the ability to make political contributions is a
protected component of our citizens' political speech. At the
same time, Congress and the federal courts have long recognized
the importance of transparency and fairness in campaign finance
to avoid any individual or entity exercising undue influence
over our elections or over our elected officials.
The Justice Department is fully committed to investigating
and prosecuting those who willfully violate the disclosure
requirements and the contribution limits established by our
campaign finance laws. Indeed, since 2010, we have successfully
prosecuted more than a dozen cases involving campaign finance
violations.
In the time since the Supreme Court's decision in Citizens
United v. FEC, however, the manner in which individuals and
entities raise and spend money in our elections has changed
dramatically and continues to change. The two most important
developments affecting our ability to enforce the campaign
finance laws are the rise of super PACs and the growing
political activity of certain types of organizations created
under 501(c) of the Internal Revenue Code, such as 501(c)(4)
social welfare groups.
We face certain investigative and prosecutorial challenges
as a result of this new landscape. With regard to super PACs,
the primary challenge we face is establishing illegal
coordination between a super PAC and a campaign. As described
more fully in my written testimony, as a result of certain FEC
advisory opinions, regulations, and matters under review, we
believe it will be exceedingly difficult for prosecutors to
prove beyond a reasonable doubt whether and when super PACs and
campaigns willfully engage in illegal coordination.
With regard to designated classes of 501(c) organizations,
we are hampered by the fact that, unlike PACs, super PACs, and
other political organizations, these 501(c)s are not required
to publicly disclose their donors to the FEC even though those
donors' contributions may be used as expenditures to seek to
influence federal elections. Instead, 501(c) organization
donors are disclosed only to the IRS as part of their tax
returns, which can be filed a year or more after an election
and are subject to the traditional restrictions on public
disclosure imposed by our tax laws.
Thus, for example, a donor seeking to bribe a corrupt
official could potentially use a 501(c) organization to hide
his identity, and we would be unlikely to ever receive the
warning signals we would need to investigate further.
Vigorous enforcement of our campaign finance laws is
essential to preserving both the integrity of our elections and
the public's confidence in these elections. The Justice
Department's prosecutors and federal law enforcement agents
work tirelessly to uncover, investigate, and prosecute campaign
finance offenses. But the recent changes in our campaign
finance laws have made it easier for individuals and entities
to buy influence over elections and conceal their conduct. And
our ability to successfully combat these threats is hindered by
the current law regarding what constitutes coordination between
super PACs and candidates and by the loss of transparency
arising from the use of designated 501(c) organizations in
connection with elections.
Despite these challenges, we are committed to vigorously
rooting out corruption and ensuring the fairness of our
elections through the robust enforcement of our campaign
finance laws.
Thank you for the opportunity to appear before you, and I
am pleased to answer any questions you may have.
[The prepared statement of Ms. Raman appears as a
submission for the record.]
Chairman Whitehouse. Thank you very much.
Ms. Haynes, welcome, and thank you for being here.
STATEMENT OF PATRICIA HAYNES, DEPUTY CHIEF, CRIMINAL
INVESTIGATION, INTERNAL REVENUE SERVICE, WASHINGTON, DC
Ms. Haynes. Thank you, Chairman Whitehouse and Members of
the Subcommittee. My name is Patricia Haynes, and I am the
Deputy Chief of IRS Criminal Investigation. Thank you for the
opportunity to testify at this hearing on the criminal
enforcement of our campaign finance laws.
My purpose here today is not to discuss the campaign
finance laws themselves or how violations of those laws are
prosecuted, which is not my area of expertise. Rather, I am
here to explain how IRS Criminal Investigation helps to enforce
the tax laws of the United States and specifically Internal
Revenue Code Section 7206.
The mission of Criminal Investigation is to foster
compliance in our tax system and compliance with the tax laws
by investigating potential criminal violations of the Internal
Revenue Code and related financial crimes. Criminal
Investigation consists of approximately 2,400 special agents
worldwide who investigate violations of the Tax Code as well as
statutes related to money laundering and the Bank Secrecy Act.
Criminal Investigation works closely with the Department of
Justice and the United States Attorneys' Offices around the
country to bring criminal offenders to justice. The work being
done by our special agents is a critical component of the IRS'
overall effort to encourage voluntary tax compliance.
Criminal tax enforcement is a crucial component of the
IRS's overall effort to encourage voluntary compliance. Under
IRS Code Section 7206, it is a felony to make false or
fraudulent statements to the IRS or to file false or fraudulent
returns or other documents with the IRS. The most common
prosecutions under this code section involve the underreporting
of income or the fraudulent inflation of deductions on federal
tax returns. But violations of 7206 may also be charged in
cases involving other types of false statements made to the IRS
on an array of IRS forms, applications, and schedules.
The government must prove four key elements in order for a
return or statement to be deemed in violation of Section 7206:
that the defendant making the statement declared it to be true;
that the statement was materially false; that the defendant
signed the statement willfully and with the knowledge that it
was false; and that the statement was accompanied by a written
declaration that it was made under the penalty of perjury.
Let me turn now to an explanation of how Criminal
Investigation investigates potential tax law violations. In
general, Criminal Investigation conducts two types of
investigations. The first type, known as an administrative
investigation, is worked outside of the grand jury process. An
administrative investigation can be initiated when Criminal
Investigation receives or develops information indicating
possible violations of laws related to tax, money laundering,
or bank secrecy. If a special agent determines that the
information supports the potential for criminal prosecution,
the special agent will launch an investigation to gather
evidence, with the special agent involved using the broad
spectrum of techniques available to him or her.
The second type of investigation arises when Criminal
Investigation submits a request to the Justice Department to
initiate a grand jury investigation either before, during, or
after an administrative investigation. This type of
investigation is initiated when the use of a grand jury would
be more efficient or would strengthen the potential for
prosecution.
At the conclusion of an administrative or grand jury
investigation, IRS criminal tax counsel evaluates the evidence
gathered and provides advice on whether to recommend
prosecution by the Department of Justice.
Criminal Investigation also works with other law
enforcement agencies that investigate campaign finance-related
offenses. In the past, such cases have involved allegations of
public corruption, improper use of campaign contributions, and
the concealment of conduit or straw contributions.
Mr. Chairman, that concludes my testimony. Thank you again
for the opportunity to appear before the Subcommittee and
describe the role that IRS Criminal Investigation plays in
helping enforce tax laws and campaign finance laws. I would be
happy to answer any questions.
[The prepared statement of Ms. Haynes appears as a
submission for the record.]
Chairman Whitehouse. Thank you very much.
Let me begin first by thanking Ms. Raman and highlighting
the point that she makes in her testimony that the current
state of affairs impedes investigation into political
corruption. That is a point that the Supreme Court has simply
failed to address, both in Citizens United and in cases that
followed. And it is a point that Senator McCain and I made in
our brief to the U.S. Supreme Court, and it is an area where I
think they need to provide some attention.
But what I would like to focus on in my questions are some
very specific acts that appear to be happening fairly
frequently and that appear to be happening with impunity. The
first is a violation of the false statements laws and
specifically in response to this question on the IRS form: Has
the organization spent or does it plan to spend any money
attempting to influence the selection, nomination, election, or
appointment of any person to any federal, State, or local
public office? So that is one sort of fact pattern that I think
is quite clear and relatively simple. We have numerous
instances where the answer to that question was a plain no, and
then very significant political activity was then accomplished
by the entity that said that it would not do that. So that is
one.
The second is the--I will just describe it. A super PAC has
no ability to shield the identity of its donors. In fact,
disclosure is part of the reason that there is a super PAC. And
yet we often see--here we go--individuals or corporations, some
anonymous entity, making a donation to what appears to be a
completely shell corporation designed just for the purpose of
laundering money into a super PAC and violating the law that
would require disclosure of the true identity, which would seem
to be a pretty clear 441(f) violation, making a contribution in
the name of another. And I am wondering why it is that the
Justice Department does not appear to bring any of those cases,
and I think the immediate answer to that question--you can
correct me if I am wrong--but I think the immediate answer to
that question is that it is because you defer to the IRS to
bring those cases to the Department, because they come out of
the tax world, and I do not know why particularly the false
statements--let me focus on that because that comes off the IRS
report.
I can see why the Department of Justice would want to defer
to the IRS on criminal prosecutions involving complex tax
matters. Making a false statement is something the Department
prosecutes all the time. It does not take particular tax
expertise to recognize a false statement when you see one or to
prosecute one when you see one. What are the inhibiting factors
that prevent DOJ from going forward? Are you rethinking
deferring so much to the IRS in these matters where it is not a
tax-specific underlying issue and is something as simple as
making a false statement? And are you satisfied with the state
of play right now with the lack of prosecution in this area?
Ms. Raman. Thank you, Senator Whitehouse, for asking those
questions. I should start by saying 18 U.S.C. 1001 is a bread-
and-butter statute that we use in our corruption cases and our
fraud cases. It is an important statute. It is one of the best
ways for us to get to the heart of cases involving people who
are trying to defraud the United States or lie to an agency of
the United States. So we fully embrace and understand the
importance of robust enforcement of 1001 in appropriate
circumstances.
Chairman Whitehouse. But I am correct that no 1001 cases
have been brought about Question 15 and the answers to it that
appear to be false?
Ms. Raman. And you have highlighted, I think, some of the
problems that we have encountered, particularly in the last
several years, regarding how to get to the bottom of some of
the activities in the flow of money that goes through
501(c)(4)s and super PACs.
One of your charts described a scenario in which an
anonymous donor provides money to a shell company and then
contributes to a super PAC. That is, in fact, something we
could and would prosecute under 441(f).
Chairman Whitehouse. But have not.
Ms. Raman. Not yet. Without discussing ongoing
investigations, we can assure you that we are incredibly
vigilant about the use of these organizations as an end run
around contribution limits.
Chairman Whitehouse. Well, I fully respect the constraints,
particularly if a grand jury will succeed, that you cannot
discuss ongoing investigations and you cannot discuss matters
that are before a grand jury. But I believe it is perfectly
legitimate to say whether a category of offense is being
prosecuted or not anywhere in the Department and whether or not
the Department has grand jury investigations addressing a
category of offense underway without going into the details of
who or where. And as I understand it, there is no activity at
this point within the Department of Justice either on false
statements made in response to Question 15 or under 441(f) for
the shell identity laundering into a super PAC.
Ms. Raman. Well, I actually cannot comment on any ongoing
grand jury matters, but setting that aside, I do want to assure
you, Senator Whitehouse, that----
Chairman Whitehouse. Can I infer from that that there
actually is a grand jury matter that might be going on? Or can
you not even say that?
Ms. Raman. I would not want to tell you that.
Chairman Whitehouse. OK. So as far as I can know, there is
zero activity.
Ms. Raman. And I do want to assure you, Senator Whitehouse,
that our Public Integrity Section within the Criminal Division
and the 94 U.S. Attorneys' Offices are focused on these kinds
of activities.
441(f) is a statute that our Public Integrity Section has
used repeatedly over the last several years. We used it prior
to Citizens United, 441(f), in the context of conduit
contributions where essentially people were using shell donors
or straw donors to funnel money to candidates. Post-Citizens
United, those people do not need to use those kinds of conduit
schemes anymore. They simply donate directly to a super PAC
because there are no limits on independent expenditures. So----
Chairman Whitehouse. Unless they want to hide their
identity, and then they do the shell corporation thing. And if
that is a 441(f) case, I would think that that is something
that could be brought. There is nothing that would legally
inhibit bringing a 441(f) prosecution in a fact pattern in
which a donor creates a shell corporation exclusively for the
purpose of hiding their identity and then has the shell
corporation, which they control and which is for the exclusive
purpose of hiding their identity, make their contribution in
its name to a super PAC. Correct?
Ms. Raman. I absolutely agree.
Chairman Whitehouse. Okay. Senator Cruz.
Senator Cruz. Thank you, Mr. Chairman. I want to thank both
of the witnesses for joining us this morning.
In my view, whenever Congress acts in the area of political
speech, the touchstone for everything we do should be the First
Amendment to the Constitution. And I think that the public
should be particularly skeptical when you have elected
politicians of either party enacting rules limiting the ability
of public citizens to criticize the behavior of their elected
officials.
In my view, the First Amendment was created precisely to
ensure that the citizens could speak without the men and women
who sit in this body restricting what they say. And I think
there are few areas that are more dangerous to have the
government engaged in prior restraint or punishment after the
fact for private citizens who would choose to speak out on
politics.
Indeed, of all the areas of speech--we have long lines of
cases extending free speech protections to all sorts of
questionable activities, including things like nude dancing--
and that is a well-established line of cases from the Supreme
Court. But of every possible area of speech, I think there is
none more central to the core purposes of the First Amendment
than political speech, than the ability of every American to
speak up and express his or her views on the direction of this
country.
And I would point out that in saying this, I am not
unfamiliar with the downsides. In Texas, I just came through a
campaign where I was on the receiving end of $35 million in
attack ads and was outspent 3:1. And let me say those who chose
to put resources into launching attacks against me had a First
Amendment right to do so, and God bless them for speaking out
and being involved in politics. And I think we should all be
concerned about those who are elected to office and immediately
want to prevent anyone from speaking and being engaged in the
political process or saying something they do not like.
Now, Ms. Raman, I would like to ask you a few questions
about your testimony. The first thing I would like to ask is:
In the Department of Justice's opinion, what is the government
interest in regulating the independent expenditures of private
citizens?
Ms. Raman. Well, we obviously understand----
Chairman Whitehouse. I think your microphone need to come
on.
Ms. Raman. I am sorry. We understand fully the holdings of
the Supreme Court in this area, and we are not suggesting
regulation of independent expenditures. Our challenge as
corruption prosecutors is something altogether different. Our
challenge as corruption prosecutors is to be able to understand
when those independent expenditures really are not independent,
where there is the kind of illegal coordination such that the
expenditures become contributions and become an end run around
the contribution limits that have long been recognized by both
Congress and courts around the country. And that is our
concern. We want to be able to have the tools that we have
always had to be able to follow the trail of money, to be able
to follow the paper trail, to be able to determine whether
there are bad actors who are illegally trying to influence our
elected officials by providing donations to the PACs that are
illegally coordinating with the campaign. And that is our
challenge now. It is simply a different challenge post-Citizens
United.
Senator Cruz. Ms. Raman, I want to make sure I understand
your answer. If I understood you correctly, you said that the
government interest was in investigating and/or prosecuting
expenditures that were not independent, that were coordinated
directly with a candidate or a campaign. Is it fair, then, to
infer that the answer to the question I asked about does the
Justice Department--is there a government interest in
regulating independent expenditures, in other words, those
expenditures that are not coordinated, is it fair to infer that
your statement is there is not a government interest? Or is
there a government interest? I do not want to put words in your
mouth, so I would like to know what the Department's view is.
Ms. Raman. Well, I am not going to speak holistically for
every circumstance in which there may be some law or regulation
passed that may be viewed as affecting independent
expenditures. But I am here to tell you that our primary
purpose is to ensure that our campaign contribution limits are
robustly enforced, and we are hampered from doing that now
given that we simply do not have the tools that we used to have
to determine whether or not super PACs are illegally
coordinating with campaigns.
Senator Cruz. But today the Justice Department is not
articulating any government interest in regulating independent
expenditures of private citizens. Is that correct?
Ms. Raman. Today I am here to tell you that our interest is
twofold: One, we want clear and common-sense understanding of
what coordination is so that we can do our job as robustly as
we have been able to; and, number two, we need transparency in
the way our campaign finance system works, so that if a donor
is, in fact, using an organization like a 501(c)(4) to hide his
identity, that we somehow be able to get that information.
Senator Cruz. Let me focus on the second part of your
answer there. You said that the Department has an interest in
transparency. Does the Department have a view on whether the
First Amendment protects a right to anonymous speech?
Ms. Raman. Again, I cannot get into every hypothetical in
which we might have some interest in talking about anonymous
speech. And I am certainly not here to suggest that our goal is
to impede a lawful ability of individuals to speak on behalf
of----
Senator Cruz. Ms. Raman, I am asking what I think should be
a fairly straightforward question. The Department is testifying
today in support of legislation forcing disclosure of political
speech, and my question is: Does the Department believe the
First Amendment protects a right to anonymous speech? That is a
question that goes right to the heart of your testimony.
Ms. Raman. I think, Senator Cruz, more important than what
the Justice Department thinks, Citizens United, the Supreme
Court upheld a disclosure regime and found it fully consistent
with the First Amendment. And we believe that the kind of
disclosure regime that the Supreme Court upheld in Citizens
United is critical to our ability to continue to understand----
Senator Cruz. Does the Department think it would be
permissible under the Constitution for the Federal Government
to require the NAACP to disclose a list of all of its members?
Ms. Raman. I am certainly not here to suggest that that is
what we are asking for.
Senator Cruz. I mean, as you know, the Supreme Court held
that cannot be required.
Ms. Raman. And, Senator Cruz, I am certainly not here to
suggest otherwise. What I am suggesting is that there is a risk
that we have seen of bad actors using the anonymity that is
given to them when they donate to 501(c)(4)s to hide the true
purpose of their donation. And we need to be vigilant about
that. We need to be able to determine when those donors are
acting with bad intent and, frankly, when a campaign or an
elected official may be knowingly allowing that kind of
donation to occur intending to be influenced in some corrupt
way. That is our job. We need to ensure that we are robustly
and vigorously enforcing Title 2, the campaign finance laws,
but also that we vigorously enforce our corruption laws. And it
is not--it has certainly been the case that we have had several
cases in which campaign contributions are, in fact, part of the
quid pro quo that goes to the heart of a bribery case.
Senator Cruz. Okay. Thank you very much. I appreciate your
being here this morning.
Ms. Raman. Thank you.
Chairman Whitehouse. Well, first, let me thank my friend
Senator Cruz for bringing new dancing into what was a very dry
and technical hearing.
[Laughter.]
Chairman Whitehouse. That is going to raise the profile of
this hearing quite a lot.
I wanted to just follow up. There is nothing in the First
Amendment that would protect threatening or corrupt speech,
even if it is anonymous.
Ms. Raman. That is right.
Chairman Whitehouse. And there is nothing in the First
Amendment that protects false statements and the prosecution of
false statements when provided under penalty of perjury.
Ms. Raman. Of course not.
Chairman Whitehouse. And there is nothing in the First
Amendment that protects anybody's right to violate disclosure
laws through a shell corporation.
Ms. Raman. No.
Chairman Whitehouse. And that so far has been the focus.
Let me ask Ms. Haynes a question. This is an issue where there
is obviously often partisan disagreement, but we have some
interesting partisan agreement among the witnesses who will
follow, which is that, as professional as your organization is,
you are not well suited to doing this particular work. Mr.
Noble says it does not appear there is any effort to target
donors to super PACs who use front organizations; there appears
to be little effort being given to making sure politically
active groups claiming 501(c)(4) status are complying with the
law; it appears that the agency rarely challenges a group's
501(c)(4) designation based on political activity; and
ultimately it does not appear that the law is being enforced.
Mr. Smith says that this is a mission for which the IRS
lacks knowledge and expertise and which is tangential to its
core responsibilities, the Service has long been particularly
prickly about being dragged into political wars, and the
agency, ``is not equipped or structured to do the job it was
asked to do.''
Let me ask both of you: Does it make sense to have the IRS
right now get from the Department of Justice the deference that
it does with respect to those two narrow particular kinds of
cases--the false statement case under Question 15, or the
441(f) case in which you have a clear shell corporation
manufactured for the purpose of violating a disclosure law? I
do not believe--I asked Ms. Raman this question--that the
Department of Justice has ever made a case or is even
investigating any case in either of those areas. I do not know
if the IRS is either. If you are not, is that a signal that
maybe DOJ's policy of deference to the IRS in this particular
set of areas, which are not tax-law specific, have nothing to
do with understanding the Tax Code, and are all about false
statement and shell corporation behavior, which is, as Ms.
Raman pointed out, frequent in many areas of criminal behavior,
whether that should be rethought and whether you are confident
that the IRS is doing a good enough job on its own and making
adequate referrals?
Ms. Haynes. Well, Senator, I can say that the IRS Criminal
Investigation has been involved in violations of campaign
finance laws using the statutes that we have. In fact, one of
the cases that we were involved in was mentioned in Ms. Raman's
written testimony out of New Jersey.
Chairman Whitehouse. A straw donor case.
Ms. Haynes. Pardon me?
Chairman Whitehouse. A straw donor case.
Ms. Haynes. Yes. Yes, it was.
Chairman Whitehouse. But not one of these shell corporation
to super PAC cases. There has never been one of those done.
Ms. Haynes. I do not have any information that I can share
on any case like that.
Chairman Whitehouse. Nor a false statement in answer to the
no on Question 15 and then subsequent immense political
activity.
Ms. Haynes. I do not have any information I can share on a
501(c)(4)-related false statement case, you are correct. But
IRS is still engaged in these types of investigations.
In the course of a criminal investigation, the special
agents gather all the facts and circumstances and make a
recommendation based on what they feel has the strongest
likelihood of prosecution, whether that is a 7206 charge or a
7212(a) charge, as was in the prior case that I mentioned. That
recommendation is reviewed by our criminal tax counsel and then
ultimately when it is referred to the Department of Justice,
the discretion lies with the prosecutor on what violations to
charge.
So IRS is involved in these types of cases. It is just that
we have not had one that I can speak of with that particular
charge.
Chairman Whitehouse. Well, I guess under the circumstance
of the testimony that we have from the subsequent panel on what
we have today, I would urge that the Department and the Service
get together and rethink whether in these two specific areas,
which I think bear little resemblance to traditional tax
violations and are, in fact, very, as I think you used the
words, ``plain vanilla'' criminal cases, whether or not that
deference to the IRS is actually serving the public interest at
this point, or whether the Department could not proceed to
investigate, empanel grand juries, bring people before them,
generate evidence, and put together a criminal case showing a
fairly straightforward false statement or a fairly
straightforward shell corporation disclosure violation. And I
do not need you to answer that right now because I know that
question is going to be answered, if it is answered at all, by
people above you in both organizations. But I would ask you to
take that away from this hearing.
Ms. Haynes. Sure, Senator.
Chairman Whitehouse. I had another round. Senator Cruz, you
are welcome to another round.
Senator Cruz. Thank you, Mr. Chairman.
Ms. Haynes, does the IRS have any position on whether
additional campaign finance legislation should be passed by
Congress?
Ms. Haynes. Senator, I do not have an official position on
that matter. I leave those decisions up to our criminal tax
counsel or our tax counsel in the Department of Treasury to
establish those types of regulations or improvements.
Senator Cruz. Thank you.
Ms. Raman, I would like to go back to the conversation we
were having a few minutes ago and understand, as best I can,
the Department's position with regard to the constitutional
protections on independent expenditures by private citizens.
As I understood our discussion, the principal basis you
were pointing to additional disclosure requirements on private
political activity is that that transparency would aid in
discovering if there is corruption or bribery. Am I
understanding you correctly?
Ms. Raman. Corruption and bribery, and if there are other
violations of our campaign contribution limits.
Senator Cruz. Now, you would certainly agree that there are
limits--and I would think significant limits--to the theory
that additional government information would be helpful for
discovering crime, that that is a theory that has the potential
to require government disclosure of virtually everything. And I
am sure you would agree there are limits to that theory.
Ms. Raman. Of course, and we obviously just want a
reasonable disclosure regime that balances the need for people
to speak freely and have their voices heard in the political
arena while still assuring us that we are able to combat both
corruption and the appearance of corruption.
Senator Cruz. Now, when I asked about a constitutional
right to anonymous speech, you made reference to Supreme Court
decisions. Does the Department of Justice maintain that the
Supreme Court has been wrong in concluding that there is a
First Amendment right to anonymous speech?
Ms. Raman. It is not the government's position to second-
guess the Supreme Court. I am here, however, to clearly
describe what some of our challenges are in light of Citizens
United. Obviously, the government took a particular position
before the Supreme Court in Citizens United, but now we have a
law, and we intend to follow it.
That having been said, there are real challenges. There are
real challenges to our ability to enforce the campaign
contribution laws, and there are real challenges to our ability
to determine when and whether there is the type of corruption
that is rooted in campaign contributions in exchange for
official acts.
Senator Cruz. Well, and I think everyone on both sides of
the aisle would agree that preventing corruption and preventing
bribery is an important governmental interest and deserves
serious focus. You mentioned, though, in your prepared
testimony that you were concerned also not just about
corruption and bribery but what you characterized as ``undue
influence.'' And I guess I have a little bit of difficulty
understanding what ``undue influence'' means, because if it is
not corruption or bribery, which is a very different thing, it
strikes me that the citizens are due all the influence they can
get in a democratic process.
So I am curious what you mean by ``undue influence,'' if it
is any different from corruption or bribery.
Ms. Raman. I do not think I intend to suggest that it is
something different from illegal acts such as corruption or
bribery or extortion by officials. What it does--what it is
that--I am focusing, however, on the fact that undue influence
often translates into those kinds of activities. I think it is
axiomatic that contributions lead to influence, and the larger
the contribution, the larger the influence. And we have seen in
certain of our corruption cases that public officials succumb
to that influence and agree to take official acts in exchange
for campaign contributions. And we just want to be vigilant
about ensuring that we can get to the heart of those kinds of
cases when and if we encounter them.
Senator Cruz. Well, but the Supreme Court has certainly
recognized a distinction between contributions and independent
expenditures, and there are a great many organizations on the
left and on the right that devote real resources to try to
convince their fellow citizens that they are right on
particular issues of public importance.
I assume it is not, for example, the Department of
Justice's position that a group like the Sierra Club exercises
undue influence. Am I right in that?
Ms. Raman. And, again, Senator Cruz, I want to be
absolutely clear. My concern is not about any one particular
group or about undue influence in and of itself. What I am
concerned about is that, given the rise of super PACs, our
ability to understand when there is the type of coordination
that causes an expenditure to become a contribution and that
contribution is over the contribution limits that have long
been established by Congress, that we want to be able to get to
that, get to the bottom of that.
Senator Cruz. So is it right, then, that to get to the
bottom of it the Department would like to know every political
contribution made to every private group? Again, I do not want
to put words in your mouth, so I am trying to understand what
your testimony is.
Ms. Raman. There are two things that would aid us as
prosecutors: greater transparency in general, and we are happy
to work with Congress or your staffs to talk further about the
particulars; number two, a more common-sense understanding and
definition about what constitutes coordination. And those two
things would assist us as prosecutors in being able to continue
to do the jobs that we have always done in terms of rooting out
corruption.
Senator Cruz. You know, we have seen in recent news reports
instances of bribery and corruption of public officials
receiving bribes. I think one, it was alleged, received a bribe
in a box of Cheerios. Another public official recently was
alleged to have kept a bribe in his freezer. So corruption is a
real problem. But I think it is qualitatively different from
regulating the efforts of private citizens to speak out in the
political process. And I will make clear at least my views. I
asked about the Sierra Club, and I can happily say, no, I do
not think they exercise undue influence. I do not think Planned
Parenthood exercises undue influence. I do not think the unions
exercise undue influence. I do not think the NRA exercises
undue influence. I think every one of them has a constitutional
right to speak out in a democracy. I think their members care
passionately about the values they are espousing, and that is
the way our system is supposed to work. And I think we should
be very cautious about the Federal Government restricting the
ability of private citizens to express their views on the
direction of our country.
Thank you.
Chairman Whitehouse. If I might add, because I think
Senator Cruz makes a very good point, and I would want the
record of the hearing to reflect that I think we have agreement
amongst everyone that it is never the government's position or
proper role to determine based on the amount of influence that
a political group or interest or individual has that they have
too much. That is a role, I think, for the voters to determine.
And in that regard, I think it is important that the record of
the hearing reflect that it is not just corruption and bribery
that are of concern in this area, but as the Supreme Court has
clearly established, making sure that citizens are informed is
an important public goal, as the Supreme Court said, to hold
corporations and elected officials accountable for their
positions and supporters so citizens can see whether elected
officials are ``in the pocket of so-called monied interests.''
And to the extent that there are laws that provide that
disclosure, I think the government then does have an interest,
if it not to be made a mockery, in enforcing the laws that we
have created for that disclosure. And clearly there are
appropriate limits on that, but I think that disclosure is an
important element in this discussion.
And, with that, I will release these two witnesses. Let me
thank you both for the work you do on behalf of the people of
the United States. I spent four years as a United States
Attorney and had great pride and satisfaction in working with
people at the Department of Justice and Main Justice and with
the IRS criminal investigative agents. You do great work, and I
am glad you came here today, and I thank you.
Ms. Raman. Thank you.
Ms. Haynes. Thank you.
Chairman Whitehouse. We will take about a two- or three-
minute break while the room gets reset for the second panel of
witnesses and come back into session in just a moment.
[Pause.]
Chairman Whitehouse. If the witnesses are present, can I
ask them to take their seats and we can proceed with the
remainder of the hearing?
Well, we are awaiting the arrival of Mr. Colvin, who I
understand has been seen and must be nearby, so we will have
him here in a moment. Indeed, here comes somebody with a
determined approach to the chair. There we go. Thank you very
much.
Let me introduce the witnesses and then have them sworn and
then ask you each to make your statements.
First, on our left, on the witnesses' right, is Lawrence M.
Noble. He is the president and CEO of Americans for Campaign
Reform, which is a nonpartisan organization supporting public
funding for federal election. He is also an adjunct professor
at the George Washington University Law School, where he
teaches campaign finance law. Previously, Mr. Noble served for
13 years as the general counsel for the Federal Election
Commission.
Our second witness, front and center, is Gregory L. Colvin.
He is chairman of the board of Adler & Colvin, a San Francisco
law firm that specializes in representing nonprofit
organizations and their donors. Mr. Colvin has written widely
on the political activities of tax-exempt organizations. From
1991 to 2009, he served as co-chair of the Subcommittee on
Political and Lobbying Organizations and Activities of the
Exempt Organizations Committee of the ABA Tax Section.
And furthest to my right is Bradley A. Smith, a professor
of law at Capital University Law School in Columbus, Ohio, and
founder and chairman of the Center for Competitive Politics.
Mr. Smith served as a Commissioner on the Federal Election
Commission from 2000 to 2005, including service as its Chairman
in 2004.
I welcome all the witnesses and ask if you would please
stand and be sworn. Do you affirm that the testimony you are
about to give before the Committee will be the truth, the whole
truth, and nothing but the truth, so help you God?
Mr. Noble. I do.
Mr. Colvin. I do.
Mr. Smith. I do.
Chairman Whitehouse. Thank you very much, and please be
seated.
Mr. Noble, we begin with you. Thank you very much for being
here.
STATEMENT OF LAWRENCE M. NOBLE, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, AMERICANS FOR CAMPAIGN REFORM, WASHINGTON, DC
Mr. Noble. Thank you. Chairman Whitehouse, Senator Cruz, I
want to thank you for inviting me to testify at this Committee
on this very important issue of the enforcement of the campaign
finance laws.
It is estimated that over $6 billion, well over $6 billion,
was spent on the last elections, with so-called independent
groups--that is the super PACs, the 501(c)(4) organizations,
and the others--spending somewhere around $1 billion, or at
least that was what was reported. We also know that a
tremendous amount of the money was not reported.
So we have a situation here now where our elections are
being funded by these independent groups, which is
constitutional, but there are also laws surrounding how those
groups should operate, and those are not being followed.
Many point to the Supreme Court's decision in Citizens
United and other decisions as saying it has hampered the
ability of the Department of Justice, the Federal Election
Commission, and the IRS to enforce the laws. And that is true.
In some ways it has. The Supreme Court has recognized the
constitutional right to make independent expenditures by
individuals and corporations.
But that overstates the case, because those who say that
often say that, well, there is no point in trying to do
anything, there is no point trying to do any reform because the
power of corporations, unions, wealthy individuals cannot be
effective under what the Supreme Court has said.
But the reality is that the FEC--the Federal Election
Commission--the IRS, and the Department of Justice are not
enforcing the laws on the books. And if they would enforce the
laws on the books, a number of the issues that we have would go
away or at least would be more manageable.
First of all, super PACs are required to report their
donors, as has been discussed. They are political action
committees. It seems logical that if they are required to
report their donors, they should actually report the person who
really gives to them. And, therefore, you should have a law, it
would seem, that would prevent somebody from giving through a
straw donor to a super PAC to hide their identity. That is
logic. And, fortunately, there is such a law, and that is 2
U.S.C. Section 441(f), which allows the government to prosecute
the giver, the intermediary organization, and the super PAC if
they knowingly give money. Through that intermediary
organization, the super PAC knows about it for the purpose of
hiding the identity of the donor. That is illegal right now.
That is not being prosecuted.
Even beyond super PACs, 501(c)(4) organizations do not have
to report their donors. That is absolutely true. But if they
make independent expenditures, they do have to report. And they
have to report anybody who gives over $200 for the purpose of
furthering an independent expenditure. That would sound like if
I gave to a 501(c)(4) organization and said, ``Here is money to
make independent expenditures,'' my name would be reported. It
is not happening. Why? Because FEC Commissioners have
determined or some have determined that unless you give for a
specific ad, you do not have to be disclosed. It is very
difficult to prove anybody has given for a specific ad.
Beyond that, any organization, whether it is a 501(c)(4) or
a 501(c)(3), any organization or any group of persons that
makes expenditures over $1,000 and has as its major purpose
political activity, federal election activity, has to report as
a political committee, report all of its donors. That is the
current law.
Given the statements made by many of the 501(c)(4)
organizations, given what we know about their funding, it is
hard to see how there is at least not an investigation as into
why some of these are not political committees. But the Federal
Election Commission has basically given up on trying to define
what is a political committee because of a dispute on the
Commission or enforcing any group to report as a political
committee if it decides not to.
As to the coordination issue, this is an area where reality
and the law have separated. Under the law, these expenditures
are allowed because they are independent. The Supreme Court
said very explicitly, the constitutional right for an
independent expenditure comes from the fact that, because it is
independent, it could hurt the candidate as well as help the
candidate, and there is virtually no chance of a quid pro quo
or any potential corruption because of that separation.
Put that statement up against what we saw in the last
election, where candidates have their own super PACs, raise
funds for their own super PACs, call them their super PACs.
Their staff, their former staff go to work on those super PACs,
and it is not surprising that neither the candidates, the
public, or anybody else seems to think that these are truly
independent organizations. So they are not independent
organizations.
Why is this happening? Because the FEC, the Federal
Election Commission, is not enforcing the law on the books; the
Department of Justice is not independently enforcing the law on
the books; and as was discussed in the previous panel, the IRS
is not taking a serious look at what these 501(c)(4)
organizations are doing.
Thank you.
[The prepared statement of Mr. Noble appears as a
submission for the record.]
Chairman Whitehouse. Thank you very much, Mr. Noble.
Mr. Colvin, welcome. Please proceed. You need to turn on
your microphone, sir.
STATEMENT OF GREGORY L. COLVIN, PRINCIPAL, ADLER & COLVIN, SAN
FRANCISCO, CALIFORNIA
Mr. Colvin. Good morning, Senators. I appreciate the chance
to come before you and address the question why we have seen so
little enforcement--civil or criminal--of the federal tax laws
that apply to political activities of 501(c)(4) organizations.
My law firm represents a broad range of nonprofits and
their donors. For 35 years, I have formed tax-exempt
organizations, including (c)(4)s, and advised them on their
political activities.
Why is the IRS in the business of enforcing political
rules? You see, every person, every entity, in the country has
a federal tax life. It must pay tax on its income unless it is
exempt by statute. The only entity allowed to have a primary
political purpose is a 527 organization; it has a partial tax
exemption and must disclose its donors over $200. All other
tax-exempts must have a primary purpose that does not include
politics. Therefore, the IRS cannot avoid the law enforcement
duty to, one, qualitatively define political activity and, two,
quantitatively determine what is too much to keep your
exemption.
The annual Form 990 has a question under penalty of
perjury: ``Did the organization engage in direct or indirect
political campaign activities on behalf of or in opposition to
candidates for public office? '' If you answer yes, you must
report the amount spent, the number of volunteer hours, and
describe what you did.
There is, though, a fundamental problem affecting
enforcement on 501(c)(4) nonprofits. The tax rules are vague,
unpredictable, and unevenly applied. Only the most flagrant
violations could be knowing, willful, or deliberate and subject
to criminal prosecution.
What is political intervention? The IRS interpretation must
be gleaned from a few old cases and rulings, internal training
materials, and a few bursts of guidance from the last decade.
The IRS insists on using an open-ended ``facts and
circumstances'' approach rather than drawing bright lines.
Political intervention under tax law is more than express
advocacy under election law, we are told, but what is it?
Reasonable minds could differ, and they do.
How much political intervention is too much for a tax-
exempt (c)(4)? Its primary operations must promote social
welfare--``the common good'' of the community. The IRS,
therefore, deduces that non-qualifying activities must be
``less than primary.''
While the Service has never pinned this down to an annual
level of expenditures, it has tacitly accepted 49 percent as a
defensible figure. Yet because of the IRS ``facts and
circumstances'' approach, we can never be sure. So,the speech
of some (c)(4) groups is chilled. They avoid the risk and stay
far below the 49 percent level, while their adversaries may go
right up to the edge.
Two things I want to say about the focus of this hearing on
(c)(4)s: First of all, there are well over 100,000 registered
with the IRS. They include well-known organizations such as
Rotary, Kiwanis, and the Disabled American Veterans, as well as
Sierra Club and the NRA. Most are highly reputable and do very
little or no political activity. They do not present a law
enforcement problem.
Second, enforcing these tax laws is not limited to the
(c)(4) class. The vagueness of these rules affects (c)(3)
charities, (c)(5) unions, and (c)(6) trade associations that
have the same primary purpose rule.
Here is the most difficult political tax law enforcement
problem: What is the difference between a political campaign ad
and an issue ad that names a candidate, says something good or
bad about them, and tells the viewer to contact the candidate
about the issue?
BCRA in 2002 required disclosure to the FEC of spending on
``electioneering communications,'' defined basically as paid
advertising that names a candidate and is broadcast within 30
or 60 days before an election. The IRS went in a different
direction. It issued Revenue Ruling 2004-6, listing a series of
six bad factors and five good factors by which to judge
``advocacy communications.'' Then three years later, it issued
Ruling 2007-41, with a seven-factor test on issue advocacy. The
two multifactor tests are not the same. Neither of them applies
directly to the key question in this hearing: What political
speech by a (c)(4) would count against its exemption?
So how can a lawyer advise his or her client, how can a
prosecutor evaluate a case, in which a (c)(4) denies it will
engage in candidate politics on its federal tax form, and on
the same day in March it broadcasts a TV ad praising a Senator
who is up for re-election in November?
Under the seven-factor IRS test, three factors look bad: It
names a candidate, expresses approval, and is not connected to
an event such as a vote on legislation. But three factors look
good: The election is still eight months away, the ad makes no
reference to the election or voting, and it mentions no
``wedge'' issues separating the candidates. What if the ad is
targeted to a battleground State? Targeting is a factor in one
ruling but not the other.
With this kind of vague, uncertain, multifactor approach,
the (c)(4) can find a reputable lawyer to advise that the ad is
not political intervention under the IRS tests. Therefore, an
officer of the (c)(4) entity can sign a tax return believing
that it is true and correct.
I want to conclude by suggesting that the IRS itself can
solve both the qualitative and quantitative problems.
The IRS and Treasury could establish a regulatory project
to define bright lines for political intervention. I chair a
drafting committee of the Bright Lines Project, sponsored by
Public Citizen, which is attempting to do exactly that.
Finally, the IRS could reconsider its position on the
``less than primary'' ceiling for (c)(4)s, (5)s, and (6)s. It
could establish a percentage, at 10 percent, as an
insubstantial level of political activity.
These reforms would go a long way toward restoring public
confidence in the tax-exempt universe.
Thank you.
[The prepared statement of Mr. Colvin appears as a
submission for the record.]
Chairman Whitehouse. Thank you, Mr. Colvin.
And now we--I do not know if it is appropriate to call you
``Commissioner Smith'' still? Does the title stick with you
after you are gone. ``Mr. Smith,'' in any event. We will go
that way. Mr. Smith, welcome.
STATEMENT OF BRADLEY A. SMITH, CHAIRMAN, CENTER FOR COMPETITIVE
POLITICS, JOSIAH H. BLACKMORE II/SHIRLEY M. NAULT PROFESSOR OF
LAW, CAPITAL UNIVERSITY LAW SCHOOL, COLUMBUS, OHIO
Mr. Smith. Thank you, Chairman Whitehouse and Senator Cruz.
Thank you for inviting me to testify today.
I want to actually be the one who challenges some of the
assumptions that have underlaid this hearing. For example, it
was said at the beginning that there are massive amounts of
money flooding into the system because of Citizens United. It
is true, for example, that spending in 2012 was up about 37, 35
percent from 2008. But between 2008 and 2004, spending rose by
about 30 percent. Spending has gone up in every Presidential
election in my lifetime, usually by a substantial amount. And
to suggest that this is the consequence of one decision I think
is incorrect.
In fact, when we look at the numbers, it appears that at an
absolute maximum, about five percent of the spending came from
corporations, for-profit corporations, and we get there only by
suggesting that everything nonprofits spent, (c)(4)s spent, was
from corporations. And we know that that is not true. We know
that much of that came from unions, and much of it came from
other individuals and so on.
Second, I do not agree that there is a huge crisis of
enforcement here. For example, we talk about the disclosure
aspect. That has gotten a lot of attention today. In fact, it
appears that about five percent of political spending in the
last election went ``undisclosed.'' Okay? Now, $380 million
sounds like a lot; five percent does not sound like maybe it is
such a dominant problem in American politics. And even that
overstates it. Much of that spending was, in fact, done
directly by groups that are well known to the public. If we are
trying to inform the public, I think most people know what the
agenda of the Chamber of Commerce is, or most people know what
the agenda of most of the types of groups that were giving
happen to be.
We have talked some about shell corporations. You know,
people go over these super PAC contribution lists and in great
detail. That is what CREW exists to do and so do some of these
other groups. And to my knowledge--I may have missed one or
two, but to my knowledge there have been two recorded episodes
of ``shell corporations.'' In both cases, it was revealed
within a matter of hours, if not days at the most, who was the
spender behind those shell corporations. And as has been
pointed out, that activity is probably already illegal,
although the people did not seem to recognize it because so
many people have been going around suggesting that, in fact,
you could use shell corporations in this way.
Next I want to address the issue of shifting enforcement to
other agencies than the FEC, which has been the big creature
here in the room. It kind of surprised me to hear all this talk
about should the IRS be enforcing campaign finance laws and so
on. Much of what is talked about and complained about with the
FEC is not a bug. It truly is a feature. People complain all
the time: ``Well, the FEC is prone to gridlock. It is 3-3.''
Actually, it does not deadlock very much 3-3. When it does,
that usually decides the issue. But beyond that, it is designed
that way intentionally so that one party cannot take over the
political system and ram things through on a 3-2 vote of
Commissioners. That is precisely what Congress said we were not
going to have, and I do not think there is any Member of this
chamber who would be willing to stand on the floor and say, ``I
am willing to give the opposition party the ability to decide
who speaks when on politics without input from my party.'' I do
not think any Member of this chamber would do that.
We need to recognize as well, for example, on coordination,
the rules are complex and it is hard to prove coordination. But
that is as well a design, because coordination investigations
are extremely sensitive. I can guarantee--well, I cannot
guarantee, but I am pretty sure--that at some point in the next
30 days, you know, all the Senators here are likely to meet
with somebody who is from a super PAC, an interest group, a
union, a trade association, right? At this point, if it is a
coordination investigation, we should then be able to
investigate that meeting. Who knows what they talked about?
Maybe if that trade association or union did any election
expenditures, maybe it was coordinated. And this is what we
find with these coordinated hearings. They are extremely
intrusive into political strategy, into political tactics, and
into the ongoing goals and efforts that folks made.
So I want to conclude by suggesting that we need to be very
careful about trying to get aggressive enforcement out of
Justice. We have seen that in the past. We have seen that at
the IRS in the past. The IRS for many years, under pretty much
every President up through Richard Nixon, of both parties, was
used for political purposes. And for that reason it has sought
hard to stay out of politics, and now Congress is trying to
drag it back in as a campaign enforcement mechanism because it
is unhappy with the fact that the FEC is set up to guarantee a
bipartisan regime.
I am going to suggest here that if you really want to
shatter confidence in government, if you really want to build
this trust, if you want to create the appearance of corruption,
then what you ought to do is use a straight party-line
political vote, either in this Congress or at the
administrative agencies that have party-line majorities, and
use that vote to attack the other side politically with no
bipartisan support. I can think of nothing more that would
shatter public confidence in government and the impartiality of
the government agencies, including Justice and the IRS, than
taking that approach.
Thank you very much.
[The prepared statement of Mr. Smith appears as a
submission for the record.]
Chairman Whitehouse. Would that apply to the Supreme Court
and the 5-4 decision with the Republican judges all holding
with no support from the minority?
Mr. Smith. I am not sure how that actually relates to the
question, but I guess I would say that, no, I do not think that
holds there at all. I do not think the judges are sitting in
partisan roles, and they are not running for election, and they
are not worried about who is going to be the next Speaker.
Chairman Whitehouse. Well, they are not running for
election, anyway.
Mr. Noble, I wanted to ask you, I am one who believes that
the FEC is logjammed. I am one who believes it is deliberately
logjammed by outside forces that have come to bear on the
Commission itself to stop actions that interfere with practices
that are useful in the political world but may actually be
unlawful if the FEC would act. And in that regard, we spend, I
do not know, close to $70 million on this Commission. Would it
be useful to and will you recommend establishing a private
right of action for a candidate or campaign that believes it
has had the law violated against it, cannot get an answer from
the FEC, and now has the right to go to the traditional
constitutional locus for adjudication in the American system of
government, which is a jury, and have that heard? And perhaps
if there was that alternative, then the satisfaction of
blockading the FEC would dissipate, and it would become more of
an active and responsive body again.
Mr. Noble. I think a private right of action is important.
There is one right now in the FEC. There are cases certain
complainants can bring if the FEC does not act. Now, there are
a lot of hoops you have to go through, but----
Chairman Whitehouse. It is very rarely done, is it?
Mr. Noble. It is very rarely done, and there are
constitutional reasons, including standing concerns about
whether people can actually sue another party.
While I think it is an important factor, I would hate to
rely on it too much because that is only available to major
players, the people who can afford lawyers. The party
committees can. It is not available to the average citizen who
cannot afford to sue the agency.
And I agree with Commissioner Smith on something which is
very important, that I think the Department of Justice needs to
do much more, but I do agree that a locus should be at the FEC.
I think the problem is the FEC is not enforcing the law, and it
is deteriorated tremendously since Commissioner Smith was
there. And there have been always been differences on the
Commission, but right now what you see are true ideological
differences, where you have three Commissioners who just do not
believe much of the law.
And I appreciate Commissioner Smith saying that these are
not bugs, these are features. I do think it is a bug that, as
of the end of this April, all six seats on the Commission will
have expired, and no appointments have been made to the
Commission. I do think that is a bug. I think it is a bug that
since 2010, when Citizens United came out, the FEC has been
trying--actually, it has given up--to come up with regulations
to explain how Citizens United affects the law. It has been
unable to do that.
It is kind of like saying when I had a sports car that ran
half the time that that was actually a feature stopping me from
using gas. No, it was a bug, and it is not acceptable.
The FEC is broken. It does not work, and something has to
be done about that. And I agree with Commissioner Smith you
have to be concerned about the political ramifications. But I
think that if you had an effective FEC, a lot of these issues
would go away. Obviously, there would always be issues that
exist, but I do think a private action is part of it, but you
have to address the FEC.
Chairman Whitehouse. Mr. Colvin, in your testimony you
addressed the Vision Service Plan case and the insubstantiality
standard. Could you elaborate a little bit further on the
insubstantial standard as it came through Vision Service and
how that conforms or does not conform with the political
activity standard, and whether that should conform? I think you
reached the conclusion that it should conform. Could you
explain your argument there and describe Vision Service Plan a
little bit more?
Mr. Colvin. Certainly. The Vision Service Plan did not
involve political activity. It involved a health insurance plan
that had, in the IRS' view, too much private benefit to certain
members of the plan. The test that it used to determine what
was too much was an insubstantial test. ``Insubstantial'' does
not have a precise----
Chairman Whitehouse. ``Insubstantial,'' in quotes.
Mr. Colvin. That is right.
Chairman Whitehouse. Yes.
Mr. Colvin. It does not have a precise percentage to it,
but there have been cases in other areas of tax law affecting
both political and lobbying activity that have said somewhere
around five or 10 percent would be considered insubstantial.
The legal precedent for this is that when the IRS
interprets words like ``exclusively'' and ``primarily,'' it
means all but insubstantial.
So the presence of one activity or one purpose, if it is
substantial, destroys the tax exemption. However, the IRS has
not taken that stance clearly in the case of political activity
and, instead, in Revenue Ruling 81-95, provided that a
501(c)(4) organization can engage in political activity, so
long as it is less than primary. And in the absence of any
percentage, many have interpreted that to be 49 percent.
So, really, the IRS, for that matter, if it were to pursue
a case of political activity under 501(c)(4), (c)(5), or
(c)(6), and the Department of Justice got hold of that case,
could very well determine that the same standard ought to apply
as in the Vision Service Plan, private benefit, insubstantial,
5-10 percent, and no more.
Chairman Whitehouse. And they are both articulating the
statutory requirement of 501(c)(4) that these entities be
operated exclusively to promote social welfare. So in the case
of Vision Service Plan, they said it was not exclusively to
promote social welfare because there was a more than
insubstantial amount of private benefit being taken out of the
organization, and your hypothesis is that you could take that
same standard that you used for private benefit and apply it to
the political side, the political benefit, and apply the
insubstantial standard.
Mr. Colvin. Absolutely. That is correct. And Miriam Galston
is here, who has written an article arguing exactly that point,
and I agree with it.
Chairman Whitehouse. Great.
Let me ask Mr. Smith a question. I think we have agreement
so far in this hearing that with respect to the First
Amendment, which clearly is a significant consideration in all
of this discussion, that--two things. One, false statements
under oath do not enjoy First Amendment protection. And,
second, where there is a constitutional requirement, not a
requirement in the Constitution but one that meets
constitutional muster, by law that fraudulent use of a shell
corporation to defeat that law is also not protected by the
First Amendment.
Would you agree with both of those hypotheses?
Mr. Smith. Certainly I would agree with the first. The
second I'm not quite sure what you are talking about. If you
are saying is it illegal to make a contribution in the name of
another, you know, yes, I think that can withstand----
Chairman Whitehouse. And despite the fact that making a
contribution is political speech that is protected by the First
Amendment, making it in the name of another is not protected by
the First Amendment and can be prosecuted properly?
Mr. Smith. I think the Court would uphold that. But it is
important for us to recognize that generally, as I have heard
the discussion about disclosure in this case, people kind of
say, well, the Court has endorsed disclosure in Citizens
United. It did, but remember, the Court has not endorsed
anything called ``disclosure.'' It has, in fact, placed huge
limits on disclosure. Even in Buckley v. Valeo, it struck down
more of the Federal Election Campaign Act's disclosure regime
than it upheld. And there is a long line of cases suggesting
that you have to be very sensitive in that area.
So you have raised what, again, I think is a very minor
problem. We do not really see many examples of it. People are
combing these things----
Chairman Whitehouse. But you do not have----
Mr. Smith. I think it is fine----
Chairman Whitehouse [continuing]. Any dispute that a
contribution in the name of another that is fraudulently done,
not innocently----
Mr. Smith. Well, you know, if you put the circumstance that
you have, which is that it is in the name of another and it is
fraudulently done--and those are the questions that will often
come up in investigations.
Chairman Whitehouse. Yes, and ditto, false statements under
oath enjoy no First Amendment protection.
Mr. Smith. Well, I do not think they do. I tell you, under
the Stolen Valor case, maybe even there they might have some.
But I think the ``under oath'' would probably take that away.
Chairman Whitehouse. Yes, it would seem that way. It would
be a novel theory if it were not.
Senator Cruz.
Senator Cruz. Thank you, Mr. Chairman, and I would like to
thank all three witnesses for being here today.
Commissioner Smith, I would like to ask several questions.
As we sit here today, Organizing for America, which is
President Obama's 501(c)(4)--indeed, their Web site is
barackobama.com. They are currently today running online ads
criticizing me.
Now, Commissioner Smith, would you agree that that is their
First Amendment right to do so that should be entirely
protected under the Bill of Rights?
Mr. Smith. I think it is a terrible thing to run ads
criticizing you, Senator Cruz.
[Laughter.]
Mr. Smith. But I probably would agree that it is protected
by the First Amendment.
Senator Cruz. And that standard should obviously apply
across the board, regardless of the partisan affiliation of the
speaker or the person being praised or criticized.
Mr. Smith. I would apply that to criticism of Chairman
Whitehouse as well, yes.
Senator Cruz. Very good.
One of the things, Commissioner Smith, you talked about was
the structure of the Federal Election Commission, in particular
that you have got three Democrat Commissioners, three
Republican Commissioners, and the role that plays as a check on
partisan excesses. And you mentioned that there has been a long
history when campaign activities have been located purely in
the executive branch, located in, say, the IRS. There has been
a long history of abuse, and abuse on both sides of the aisle.
There were allegations of abuse under President Nixon. There
were allegations of abuse under President Johnson.
Can you share your views on the importance of the
structural check of the FEC's organization to limit either
party abusing the executive branch to punish their political
enemies?
Mr. Smith. Well, I think obviously it is very, very
important, you know, and the history, I have outlined some of
it in my prepared remarks. We see cases like the very first
prosecution brought under the Federal Election Campaign Act was
brought against a group of people, ordinary citizens,
basically, kind of upper-middle class folks who had a little
bit of money to pool, some professors and so on, who ran an ad
in the New York Times criticizing Richard Nixon and calling for
him to be impeached. This was before Watergate. And the Nixon
folks said, well, if somebody is convinced we ought to be
impeached, maybe they will be convinced not to vote for me, we
ought to be able to go after these folks.
And so I really know that it is very important--you know,
long history under both parties, that that is why Congress set
up a bipartisan agency--not bipartisan like many agencies, 3-2
majority or something, but a true 3-3.
The Commission has historically deadlocked, as people say,
gone 3-3 on about one to four percent of its votes. In recent
years, that has spiked up to about 10 percent of its votes. One
thing I'd point out is that typically resolves the issue, and
it is important to note that that spike may be precisely due to
the fact that over the last couple years we have seen, I think,
strong attempts by partisans to use disclosure in the campaign
finance rules in that way.
You know, Media Matters, a very liberal group, has, for
example, said that its goal is to attack corporations that
might make political contributions of any kind, which would
include contributions to a trade association that makes
political expenditures. And then use its allies to then attack
that same corporation for the damage done to its reputation,
which is created by Media Matters itself.
Candace Nichols, an opponent of Proposition 8 out in
California, made the comment afterwards that they were
blacklisting and boycotting a number of folks, and she said,
``Years ago''--they used the campaign finance regulations
disclosure to get that. She said, ``Years ago, we would have
never been able to get a blacklist out that fast and quickly.''
Apparently this is considered progress since the McCarthy era.
We are now much more efficient at creating blacklists.
There is a group called Accountable America that sent
letters to thousands of conservative donors threatening to dig
through their lives if they continued to do that. As the New
York Times reported, it was ``hoping to create a chilling
effect that will dry up contribution.''
There are groups such as Huffington Post and eight maps
that put maps to donors' homes right on the Web. What is the
purpose of that?
I am straying a bit from your question, but what I am
saying is when you are in this kind of environment, it is
really important that you have some degree of bipartisan
support before acting.
Senator Cruz. Well, and I think the examples you gave about
the potential for partisan retribution are particularly
chilling. And they are most dangerous, it seems to me, for
those who would have the temerity to criticize those in power;
that a system that requires full disclosure of any citizen's
activity in the political sphere enables those in power to very
directly exact punishment for any who dare criticize them.
Mr. Smith. Well, the purpose of disclosure laws, as I have
always seen them, is to inform citizens about their government,
but not to inform the government about their citizens.
Now, those are often two sides of the same coin, so it is
hard to tease them apart. But I do think when we look at, you
know, organizations that are not working with candidates, for
example, that we need to start thinking about being careful
about what it is that we are doing. When we are talking about
direct contributions to candidates or parties, that is
historically where we have allowed more disclosure, and that is
where the Supreme Court upheld it in Buckley. Remember, in
Buckley, the Supreme Court struck down most of the disclosure
regime that otherwise existed. It was a very broad disclosure
regime that would have taken in almost anybody who spoke about
politics at all, whether they were giving to a candidate or
not. And the Court struck most of that down.
Senator Cruz. And I guess the threat of retribution for
political speech, as you just described, is not hypothetical.
We have seen it for donors who supported Proposition 8 in
California and lost their job because they engaged in political
speech.
I guess we recently saw with respect to another
constitutional right in New York a number of gun owners being
publicly identified in the newspaper and potentially subject to
retribution for exercising their Second Amendment right to keep
and bear arms.
Would you agree that part of the reason the First Amendment
protects the right to anonymous speech is precisely to prevent
retribution for citizens engaging in speech? And, indeed, that
was much of the reason why perhaps the most famous example of
anonymous political speech in history was the Federalist
Papers, published under the pseudonym Publius.
Mr. Smith. Right. Well, as the Supreme Court said in the
NAACP case that you mentioned earlier, Senator, ``It is hardly
a novel perception that compelled disclosure of affiliation
with groups engaged in advocacy may constitute . . . effective
. . . restraint on freedom of association . . . .'' I think it
is very definitely something--I have said sometimes imagine if
the government said we are going to make sure that terrorists
are not infiltrating our government or foreigners are not
infiltrating our government, we are going to require you to
report your political activity to the government, and they are
going to keep it in a big data base, and it will be made
available to creditors, mortgage lenders, potential employers,
your nosy neighbor, Halliburton, whoever wants it, right? Most
people I know get very, very upset. And then I point out to
them that that is exactly what the Federal Election Campaign
Act does, and we are talking about doing more of it.
And I want to emphasize that we already have broader
disclosure in America now than we have had any time in our
Nation's history. We are in the greatest disclosure age of our
history. And I think when we look, we do not see that it is
really achieving its goals, and I wonder if the real solution
is to say we have got to have more and crack down more if it is
really to change the idea and try to create different
incentives for people to participate.
Senator Cruz. Thank you very much, Commissioner, and thank
you to all of you.
Chairman Whitehouse. Let me ask one additional question,
and that is, your opinion--let me start with you, Mr. Noble.
You have made the observation that there is conspicuous non-
enforcement of a variety of laws in situations in which the
enforcement of the law actually would be reasonably
straightforward. A false statement case is not a complicated
thing to make, and the 441(f) shell corporation, you know, use
of shell corporations to violate the law occurs in all sorts of
areas of the law. So why the non-enforcement?
And let me add an asterisk to that. I know that DOJ will
say, ``Well, why the non-enforcement is because we have not
been referred cases by the IRS.'' But that really begs the
question, because the Attorney General and the Secretary of the
Treasury and the Commissioner of the Internal Revenue Service
all work for the same person, and the Attorney General could
perfectly well say to his colleague, ``Look, these are laws
that I am supposed to enforce. We prosecute false statements
all across the board. Why aren't you referring these to us?
What is going on with your regulations that makes this
difficult? '' And you might then see some of the progress that
Mr. Colvin has suggested toward the IRS redoing the
regulations, to the extent that that is described as the
problem.
So that is really, I think--when that is the answer to the
question, that is really just another way of asking the
question. So I wanted to make sure that you looked at it that
way. Why the non-enforcement? And if the reason is because the
IRS does not make referrals and has adopted confusing and
different regulations, why are they satisfied with that as the
status quo?
Mr. Colvin. I think there are several reasons, and I have
to say up front, I have tremendous respect for the staff of
federal agencies, of the IRS and the Department of Justice. I
think they try very hard to do what the right thing is.
I think there is a certain amount of fear. There is a fear
of getting involved in politics. There is a fear of being
accused of being partisan when you are not being partisan, when
you are calling it as you see it, but people are going to say,
``You did that just for partisan reasons.''
I think as you move up the chain, I think then you get into
a power issue. Frankly, the current system helps those in
power. The current system, the lack of enforcement, favors
those who are writing the laws right now, who are enforcing the
laws right now. It favors this administration to keep a system
by which they won in place. They do not want, frankly, any more
disclosure. They are not calling--this is a great
disappointment, but this administration right now is not
calling to redo the FEC, not calling for much stricter
enforcement of these laws, not calling for a crackdown on OFA,
Organizing for America. They are not doing that either. Why?
Because I think the problem we face is that we are
fundamentally dealing about a power issue here and about the
right of voters.
There is a very critical First Amendment issue, no doubt
about that. It is paramount in this area, and everything we do
in this area involves the First Amendment. But there is also an
issue about democracy, about our right to know what the
government is doing, about our right to know where Members of
Congress or Senators are getting their funding, who they may be
beholden to. And these are the issues the Supreme Court has
upheld. These are the things the Supreme Court has said the
government has a compelling interest in. And when it says ``the
government,'' it means the people have a compelling interest in
knowing who are funding the campaigns.
And when the Supreme Court says these expenditures have to
be independent or that 501(c)(4) organizations that do not get
involved in political activity do not have to disclose, there
are caveats that go along with that. That means that they are
not involved in political activity. And we are not talking
about every issue. We are not talking about arguing about gun
control. There are very specific--the Court is limited to very
specific types of ads: express advocacy ads, electioneering
communication ads, or things that are done in coordination with
a candidate. These are very, very specific issues, very
specific areas where the public has a right to know; the public
has the right to have the law enforced as it is; and, yes, the
public has a right to be protected.
But just to quote the First Amendment and say that that bar
is doing anything, I think, is really to present the public
with a false option. You can have the strongest First Amendment
and a very strong representative democracy that actually is
responsible to the people, and the people understand and make
the decisions about what they feel about where the
contributions are going or who is supporting whom.
So I think it is fear, and I think it is politics and
power.
Chairman Whitehouse. Senator Cruz.
[No response.]
Chairman Whitehouse. All right. Let me thank the witnesses
for coming. I really appreciate the effort that went into the
testimony. I think that each one of you provided very
thoughtful and extensive testimony. Mr. Smith, I thought some
of the historical examples that you brought out were
particularly instructive and helpful. And I am delighted that
you all shared your time with us. I know you are very busy
people.
Senator Leahy has a statement for the record, our Chairman,
that, without objection, I will add to the record of these
proceedings.
[The prepared statement of Chairman Leahy appears as a
submission for the record.]
Chairman Whitehouse. And I want to thank Senator Cruz for
attending. He brings a very valuable and well-honed
perspective. But I do think that there has emerged an area of
agreement that really translates across all of the participants
in this hearing, and that is that a traditional prosecutable
false statement under oath is not protected by the First
Amendment, and that the use of shell corporations fraudulently
to violate the law is not protected by the First Amendment. And
yet those specific things within the much larger context of
campaign finance reform, those specific things seem to be
happening a lot, and that neither the Department of Justice nor
the Internal Revenue Service could identify a single case they
had ever made either in the circumstance of a false statement
made to the famous Question 15 or in the case of a shell
corporation used to obscure the origin, unlawfully, of a
contribution to a super PAC that would otherwise have to be
disclosed. Those seem like very straightforward cases.
And it appears--I will now venture into my own personal
opinion at this point. It appears to me that the deference of
the Department of Justice to the tax authorities with respect
to those specific matters is not merited. They are not the kind
of case that a prosecutor looks at and says, ``Oh, my gosh, I
better bring the tax guys in on this one. This is a complicated
question of tax law.'' No. A false statement is a false
statement, and if you take people into a grand jury, you can
pretty well find out very quickly what the intent was and prove
the materiality and move on.
So it appears to me that if there is at least one flaw in
what we are doing right now, it is, with respect to those
matters, the willingness of the Department of Justice to allow
itself to be constrained by this policy of deference, which is
its own policy, to the Internal Revenue Service, which I think
all of the witnesses--many of the witnesses, at least--agree is
not particularly well suited, is not particularly well staffed,
and is not particularly well disposed toward this sort of a
matter.
So I will close the hearing with my personal commentary and
look forward to continuing to work on this issue with all of
the witnesses and all of the Members of the Subcommittee.
Again, my gratitude to Senator Cruz for his helpful
participation in this hearing.
Thank you, and we are--the record will be open for one week
for any additional matter anybody wants to add to the hearing,
and with that, we are adjourned.
[Whereupon, at 11:43 a.m., the Subcommittee was adjourned.]
[Questions and answers and submissions for the record
follow.]
[Additional material is being retained in the Committee
Files; see Contents.]
A P P E N D I X
Additional Material Submitted for the Record
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Prepared Statement of Chairman Patrick Leahy
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Prepared Statement of Senator John Cornyn
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Prepared Statement of Mythili Raman, Assistant Attorney General, U.S.
Department of Justice
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Prepared Statement of Patricia Haynes, Deputy Chief, Internal Revenue
Service, Criminal Investigation
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Prepared Statement of Lawrence M. Noble, President and CEO, Americans
for Campaign Reform
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Prepared Statement of Gregory L. Colvin, Principal, Adler & Colvin, San
Francisco, California
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Supplemental Prepared Statement of Gregory L. Colvin, Adler & Colvin,
San Francisco, California
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Prepared Statement of Bradley A. Smith, Chairman, Center for
Competitive Politics, Josiah H. Blackmore II/Shirley M. Nault,
Professor of Law, Capital University Law School, Columbus, Ohio
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Questions submitted by Senator Amy Klobuchar for Mythili Raman,
Patricia Haynes, Lawrence M. Noble, Gregory L. Colvin, and Bradley A.
Smith
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Questions submitted by Senator Charles Schumer for Mythili Raman and
Patricia Haynes
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Responses of Mythili Raman to questions submitted by Senators Schumer
and Klobuchar
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Responses of Lawrence M. Noble to questions submitted by Senator
Klobuchar
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Responses of Gregory L. Colvin to questions submitted by Senator
Klobuchar
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Responses of Bradley A. Smith to questions submitted by Senator
Klobuchar
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Miscellaneous Submissions for the Record
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Additional Submissions for the Record
Submissions for the record not printed due to voluminous
nature, previously printed by an agency of the Federal
Government, or other criteria determined by the Committee, list
Petition for rulemaking on campaign activities by section
501(c)(4)
http://www.democracy21.org/uploads/
D21_and_CLC_Petition_to_IRS_7_27_2011.pdf
Democracy 21 report: leading presidential-candidate
super PACs http://www.democracy21.org/uploads/
Democracy_21_Super_PAC_Report_1_4_2012.pdf
``The FEC: The Failure to Enforce Commission'' by Fred
Wertheimer and Don Simon http://www.acslaw.org/sites/
default/files/Wertheimer_and_Simon--The Failure to
Enforce Commission.pdf