One of the biggest myths about party finance reform is the idea that regulating party activity actually works. Instead, however, the interventions of the state into party affairs are very prone to failure. This is because it is in the interests of at least some parties to evade the rules, and they inevitably find legal means to do so. According to electoral law expert, Michael Pinto-Duschinsky, ‘In country after country, the introduction of new regulations has been followed by the development of new loopholes and new methods of financing politics that escape existing rules’ (Pinto-Duschinsky, 1998). So in order to evaluate the appropriateness of further state regulations it is important to ascertain their effectiveness of such rules in achieving their stated objectives. The problem is that state intervention becomes a ridiculous chase to plug up the inevitable loopholes that arise from every rule the state introduces [Read more below]
The failure of donation disclosure rules
The failure of regulation is most obvious in regard to the disclosure of donations. In this area there are a number of loopholes whereby large donations can be made without being declared. That these loopholes are very effective is suggested by the large discrepancy between what parties declare in their returns of donations, and what they spend in the three months before polling day. For instance, in the 2002 general election Labour spent $2,089,797 (including broadcast advertising) but for that year only declared $617,719 to the Electoral Commission. Likewise, Act spent $1,791,858 (including broadcast advertising) but only declared $88,971 in the same year. The discrepancies might simply be explained by the fact that parties do not have to report all income or because they may spend part of their income raised in previous non-election years. It appears likely, however, that parties are accepting many large donations in such a way that does not require disclosure.
Sometimes political parties attempt to evade the regulations by getting their donors to break their large contributions into smaller donations that are below the level specified in the state regulations. In order to prevent those making a series of donations of amounts below the threshold from being excluded from a party’s report on donations, the Electoral Act requires that all donations from the same source must be aggregated for the year. There is, however, nothing to stop a donor from breaking down their contribution and attaching different names to the amounts.
Most controversially, the Electoral Act allows political parties to record a donor as ‘anonymous’, thus permitting large donations to continue to be unaccounted for. In the 2002 election year the parties disclosed $1,558,951 in donations over $10,000, of which $692,600 came from anonymous sources. Furthermore, anonymous donations below the threshold for aggregation logically do not need to be aggregated annually. This means that a donor could anonymously contribute, say, $9,999, every day of the year, and none of the payments would have to be declared. While the regulations stipulate that for a political party to label a donation as ‘anonymous’, the donor must be truly unknown to the party, in reality it is not possible to police such rules.
Funding through business ventures
Alternatively, parties can direct donations through bogus business ventures. For example, according to rules outlined by the Electoral Commission, ‘People who pay to attend a fund-raising event will generally be paying for goods or services rather than making a donation’ and hence are not subject to the disclosure regulations (Electoral Commission, 1998b: p.14). Political parties can therefore hold fundraising events, such as a dinner function with the attendance of party leaders, to which entry would require a large amount of money, and this would be deemed a business transaction rather than a political contribution.
'In kind' donations
A further way of providing covert assistance is to donate ‘in kind’ contributions instead of financial payments. By providing free or discounted goods or services that would otherwise need to be purchased, a donation is effectively made. However, in New Zealand the government regulations also apply to these non-cash donations. The Electoral Commission has pointed out: ‘If goods and services are provided to a party under a contract at 90 percent or less of their reasonable market value, the amount of the difference between the contractual price of the goods and services and their reasonable market value should be recorded as a donation’ (Electoral Commission, 1998b: p.14). The extent to which the Electoral Commission polices such in-kind donations is not known.
Donations as loans
Donations can also be disguised as loans. In this situation, ‘The party stands to benefit from below-market interest rates. Moreover, if the party proves unable to repay the loan it may be possible for the donor to write off the loan at a later stage as a business loss’ (Pinto-Duschinsky, 1998). This occurred in New Zealand during the 1950s, when trade unions were restricted in the donations they could make to political parties, and according to Milne, they therefore would often ‘make a contribution to the Labour Party in the disguise of a "loan", which was not repaid and was later written off’ (Milne, 1966: p.105).
Political Trusts
A common scheme is to direct money from donors through other entities. In New Zealand, these entities are often trusts. As will be discussed in a future blog post, the arrival of such conduits mirrors the development of political action committees (PACs) in the United States. These PACs are connected to parties and candidates but are all legally unrelated to them and therefore are unaffected by the laws relating to donations and campaign expenditure. For instance, in the past the Act party has assigned an associated organisation called the Association of Consumers and Taxpayers Inc to collect donations on behalf of the party and then to donate the lump sum to Act. The donations from the public to this ‘non-party’ organisation do not have to be declared to the Electoral Commission – only the overall annual donation made from the Association to Act has to be recorded. In 1997 the Association of Consumers and Taxpayers donated $62,500 to Act. Likewise, the National Party has channelled some of its donations through the supposedly independent New Zealand Free Enterprise Trust, receiving $685,000 from it between 1998 and 2001. In 1999 a related organisation named The Southern Free Enterprise Trust donated a further $78,013 to various National Party electorate organisations. Such entities are clearly a front for receiving money for the party in a form that means National can avoid having to disclose an embarrassingly large amount of ‘anonymous’ donations. Labour, too, has been reported as advocating the use of solicitor trust funds to channel anonymous donations from businesses that the party has approached for funding (Milne, 2001a: p.2). Similarly, donations can be made to the personal funds of politicians, and therefore the parties never have to declare the income (Pinto-Duschinsky, 1998).
This blog posting will be updated over the next few weeks and months. But the main point to take from it is the argument that regardless of the desirability to clamp down on certain party activity, the lessons of political history show that the parties will always find ways around the rules.
Bibliography
Electoral Commission (1998b) Guide to Disclosure of Donations Made to Registered Political Parties, Wellington: Electoral Commission.
Milne, Jonathan (2001a) ‘Prebble Plays Down Claims About Big-Business Donors’, Dominion, 2, 23 April 2001.
Milne, Stephen (R S) (1966) Political Parties in New Zealand, Oxford at the Clarendon Press.
Pinto-Duschinsky, Michael (1998) Administration and Cost of Elections (ACE) Electronic Publication, http://www.aceproject.org
